Market Update: Dollar Stability Amid Political Turmoil
The dollar remained stable on Thursday, marking its best week in almost a year, primarily driven by a weakening yen, which is facing challenges from recent changes in Japan’s ruling party. It’s, uh, an interesting situation.
This week has seen significant political upheaval in both Japan and France. Meanwhile, the ongoing U.S. government shutdown has not helped investor confidence. Many are turning to safer assets, like gold, which seems to be the go-to for some right now.
In Japan, the election of conservative Sanae Takaichi as president of the Liberal Democratic Party might lead her to become the country’s first female prime minister. This development has sparked expectations of increased spending and monetary easing. The yen fell sharply, hitting an eight-month low of ¥153 per dollar before slightly rebounding to ¥152.49. Notably, this week has seen the yen drop over 3%, headed towards its worst performance since September 2024.
“The rise in dollar/yen seems unstoppable right now,” said currency strategist Carol Conn from Commonwealth Bank of Australia. I mean, it really feels like there’s no turning back.
With Takaichi’s potential elevation to prime minister and the upcoming Bank of Japan meeting, further yen depreciation might be on the horizon. If she adopts more dovish stances on fiscal and monetary policies—which, I suppose, many are expecting—it could indicate that interest rates will remain low for some time.
In France, President Emmanuel Macron is poised to appoint a new prime minister in the next couple of days, all while navigating a deepening political crisis triggered by Prime Minister Sébastien Lecornu’s unexpected resignation. It’s a tangled situation.
The euro has experienced a bit of a bounce, last trading 0.09% higher at $1.1639, recovering from three straight days of losses, though it’s still down nearly 0.9% this week. The shifts in the yen and euro have played a role in supporting the dollar, which has gained more than 1% over the past week, effectively keeping other currencies in check.
The Australian dollar saw a slight increase of 0.07% to $1.3413, after previously hitting a near two-week low. Additionally, the stock rose 0.11% to $0.6594.
As for the New Zealand dollar, it edged up 0.1% to $0.5792, despite earlier declines following a bold 50 basis point interest rate cut by the Reserve Bank of New Zealand. They’re clearly worried about the economy’s state, leaving the door open for more easing in the future.
Against a variety of currencies, the dollar remained mostly unchanged at 98.77. Federal Reserve officials recently discussed rising risks to the U.S. job market that could warrant interest rate cuts, yet there is a prevailing caution due to persistent inflation. The September meeting’s minutes reflected this hesitancy among policymakers.
“As expected, the Fed minutes highlighted their caution regarding future rate cuts,” Conn noted. There seems to be a consensus that the market is factoring in two more rate cuts by the end of the year. However, new economic indicators will be crucial, but it’s unclear when those will arrive due to the ongoing government shutdown.
In short, a prolonged shutdown could leave the Fed without essential economic data during its October meeting. Still, investors are anticipating about 44 basis points of easing by December this year.
