The US dollar fell against a basket of major currencies on Wednesday after remarks by Federal Reserve Chairman Jerome Powell strengthened market expectations for a series of interest rate cuts over the coming months.

The Japanese yen and the Australian dollar emerged as the best-performing currencies of the day, both continuing to recover from the sharp declines they recorded against the greenback last week.

Analysts also pointed to additional support from Beijing’s decision to fix the official yuan exchange rate at a stronger level than the 7.1 per dollar line — the first time Chinese authorities have taken such a step since last November.

Despite rising trade tensions between the United States and China, including a new tariff dispute, the risk-sensitive Australian dollar continued to climb. The yen also strengthened, even amid growing uncertainty over Japan’s next prime minister, with local media reports suggesting that a parliamentary vote scheduled for next week could be delayed due to internal political disagreements.

Dollar Index Extends Losses for the Second Session

The dollar index — which measures the greenback’s performance against six major currencies — fell by 0.2% to 98.844 points as of 05:36 GMT, extending its 0.2% decline from the previous session.

In a speech on Tuesday, Jerome Powell kept the door open for potential rate cuts, noting that the US labor market remains mired in stagnation with low levels of hiring and layoffs. He added that the lack of official economic data caused by the government shutdown has not prevented monetary policymakers from assessing the outlook “at least for now.”

According to LSEG data, markets are currently pricing in a strong probability that the Federal Reserve will cut rates by 25 basis points at its October 28–29 meeting, followed by another cut in December and three additional cuts next year.

Analysts at DBS said markets are currently trading in a “Goldilocks mode” — a reference to an ideal balance between solid economic growth and accommodative monetary policy. They added that “trade tensions, the government shutdown, and inflation concerns are all being set aside for now.”

Comments from Washington and Beijing Ease Market Concerns

Remarks by Jamieson Greer, the US Trade Representative, helped calm markets on Tuesday after he told CNBC that President Donald Trump still plans to meet Chinese President Xi Jinping in an effort to reduce trade tensions between the two nations.

In currency markets, the dollar fell 0.4% to 151.23 yen after earlier touching a session low of 151.005 yen. It also slipped 0.2% to 7.1284 yuan in offshore trading.

The Australian dollar rose 0.4% to 0.6514 US dollars after falling 0.5% the previous day to its lowest level since August 22 at 0.64405 dollars.

Meanwhile, the New Zealand dollar edged up 0.1% to 0.5718 dollars after hitting a six-month low of 0.56839 dollars on Tuesday.

Paul Conway, chief economist at the Reserve Bank of New Zealand, told Bloomberg TV on Wednesday that policymakers stand ready to cut rates again if necessary, following a significant rate reduction last week.

Euro and Pound Supported by Domestic Developments

The euro rose 0.1% to 1.1621 dollars after gaining 0.3% in the previous session, supported by the French government’s proposal to suspend its controversial pension reforms — a move investors viewed positively for eurozone markets.

The British pound climbed 0.3% to 1.3355 dollars, rebounding from Tuesday’s losses after official data showed a slowdown in UK wage growth, prompting some traders to scale back bets on further monetary tightening from the Bank of England.

Gold prices rose in European trading on Wednesday, extending their gains for the fourth consecutive session and continuing to set new records, successfully trading above the 4,200-dollar-per-ounce mark for the first time in history.

This surge was supported by a decline in the US dollar against a basket of global currencies, particularly following recent comments by Federal Reserve Chairman Jerome Powell, which strengthened expectations of US interest rate cuts in October and December.

To reassess those expectations, global financial markets are now awaiting the release of key US inflation data for September in the coming days, which will provide further evidence on the path of US monetary easing.

Price Overview

• Gold prices rose by 1.85% to 4,218.23 dollars per ounce, the highest level on record, from an opening price of 4,142.06 dollars, after touching a session low of 4,140.73 dollars.

• At Tuesday’s settlement, gold gained 0.8%, marking its third consecutive daily advance and another record high amid strong safe-haven demand.

US Dollar

The US Dollar Index fell by more than 0.3% on Wednesday, deepening its losses for the second straight session and hitting a one-week low of 98.73 points, reflecting continued weakness of the greenback against a basket of major and minor currencies.

As is well known, a weaker dollar makes dollar-priced gold more attractive to investors holding other currencies.

The dollar’s decline came under pressure from recent remarks by the Federal Reserve chairman, as well as renewed trade tensions between the United States and China.

US Interest Rates

• Jerome Powell said on Tuesday that the labor market remains stagnant, with both hiring and layoffs at low levels, and that the lack of official economic data due to the government shutdown has not prevented policymakers from assessing the economic outlook — at least for now.

• Philadelphia Fed President Anna Paulson stated that rising risks in the labor market reinforce the case for further US interest rate cuts.

• According to CME Group’s FedWatch Tool, markets currently price in a 96% probability of a 25-basis-point rate cut at the October meeting, while the probability of rates remaining unchanged stands at 4%.

• To reassess these probabilities, investors are awaiting the release of key US inflation data for September in the coming days, though the release could be delayed if the government shutdown continues.

Gold Outlook

• Peter Grant, Vice President and Chief Metals Strategist at Zaner Metals, said that escalating trade tensions between the United States and China, the ongoing government shutdown, and expectations of further monetary easing by the Federal Reserve are all factors supporting gold.

• Grant added that US President Donald Trump’s threats to impose 100% tariffs on Chinese goods, reciprocal port duties between the world’s two largest economies, and the broader global shift away from the dollar could push gold prices to 5,000 dollars per ounce by mid-next year.

• Analysts at Bank of America and Société Générale now expect gold to reach 5,000 dollars per ounce in 2026.

SPDR Fund

Gold holdings in the SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, rose by 2.57 metric tons on Tuesday, marking the third consecutive daily increase and bringing total holdings to 1,018.88 metric tons — the highest level since July 12, 2022.

The euro rose in European trading on Wednesday against a basket of global currencies, extending its gains for the second consecutive day against the US dollar, as part of its recovery from two-month lows, supported by weakness in the American currency following comments by Federal Reserve Chairman Jerome Powell.

The rise was also supported by positive political developments in France, where newly appointed Prime Minister Sébastien Lecornu suspended the 2023 pension reform until after the presidential elections scheduled for 2027, in a move aimed at easing political and social tensions in the eurozone’s second-largest economy.

Price Overview

• The EUR/USD exchange rate rose by 0.2% to 1.1626 from an opening level of 1.1606, after hitting a low of 1.1601.

• The euro ended Tuesday’s session up by 0.3% against the dollar, marking its second gain in the past three days, as part of its recovery from a two-month low of 1.1542 dollars.

US Dollar

The US Dollar Index fell by more than 0.2% on Wednesday, extending its losses for the second consecutive session and moving away from two-month highs, reflecting continued weakness in the greenback against a basket of major global currencies.

Jerome Powell left the door open for a potential interest rate cut at the Federal Reserve’s policy meeting on October 28–29. He stated on Tuesday that the labor market remains stagnant, with both hiring and layoffs at low levels, and that the absence of official economic data due to the government shutdown has not prevented policymakers from assessing the economic outlook, at least for now.

Political Developments in France

French Prime Minister Sébastien Lecornu announced the suspension of the 2023 pension reform until after the presidential elections scheduled for 2027, in a move aimed at reducing political and social tensions and responding to strong pressure from left-wing lawmakers who warned that pushing ahead with the reform could jeopardize the political stability of the new government.

Analysts believe this shift reflects a move toward less austere fiscal policies compared to the previous administration, signaling Lecornu’s intent to calm public sentiment and strengthen confidence in his newly formed government.

At the same time, French bonds recorded strong performance, becoming the best among their eurozone peers, according to economist Marc Chandler, who noted that markets are viewing the easing of austerity measures and the support for political stability in Paris positively.

European Interest Rates

• Market pricing currently shows less than a 10% probability of a 25-basis-point rate cut by the European Central Bank in October.

• Traders have scaled back expectations for further monetary easing by the ECB, suggesting that the current rate-cutting cycle may be over for this year.

• To reassess these probabilities, investors are awaiting a series of upcoming economic data releases in Europe, in addition to monitoring remarks from ECB officials.

The Japanese yen rose in Asian trading on Wednesday against a basket of major and minor currencies, extending its gains for the second consecutive day against the US dollar and reaching its highest level in a week, supported by the decline in the American currency following comments by Federal Reserve Chairman Jerome Powell.

This rise was also bolstered by the intense moves of Japan’s opposition parties, which are seeking to unite and agree on a consensus candidate for the premiership in an effort to break the Liberal Democratic Party’s long-standing dominance of the political scene.

As a result, Sanae Takaichi faces growing challenges on her path to power, especially after the sudden withdrawal of the Komeito Party, the traditional coalition partner in the ruling alliance, which significantly weakens her chances and increases political uncertainty in Japan during this sensitive period.

Price Overview

• The USD/JPY exchange rate fell by 0.55% to ¥151.00 — its lowest in a week — from an opening level of ¥151.84, after touching a high of ¥151.87.

• The yen ended Tuesday’s session up by 0.3% against the dollar, marking its second gain in the past three days, as part of a recovery from an eight-month low of ¥153.27.

US Dollar

The US Dollar Index fell by more than 0.2% on Wednesday, extending its losses for the second session in a row and moving away from its two-month highs, reflecting continued weakness in the greenback against a basket of global currencies.

Jerome Powell left the door open for a potential interest rate cut at the Federal Reserve’s policy meeting on October 28–29. He stated on Tuesday that the labor market remains stagnant, with both employment and layoffs at low levels, and that the lack of official economic data due to the government shutdown has not prevented policymakers from assessing the economic outlook — at least for now.

Political Developments in Japan

Japan’s political scene is experiencing unprecedented turmoil following the resignation of Prime Minister Shigeru Ishiba on September 7 and the continuation of his cabinet in a caretaker capacity. Sanae Takaichi, leader of the Liberal Democratic Party, now faces a tough challenge in her bid for the premiership after the sudden withdrawal of the Komeito Party from the ruling coalition on October 10, which cost her party its parliamentary majority.

This development opened the door for the opposition to unify its ranks. The Constitutional Democratic Party, Japan’s largest opposition force, plans to form an alliance with Komeito to support a consensus candidate, Yuichiro Tamaki, who is emerging as a potential leader capable of steering a strong opposition bloc.

While the Liberal Democratic Party remains the largest group in parliament with 196 seats, its waning influence and the growing momentum of the opposition signal a possible political shift in the world’s fourth-largest economy.

Opinions and Analysis

• A note from Bank of America highlighted that attention is turning toward the runoff in the prime ministerial election, which will take place in two rounds. The two candidates with the highest votes in the first round will compete if no one secures an outright majority. The note clarified that if the House of Representatives and the House of Councillors select different candidates, the decision of the lower house will take precedence.

• The bank added, “Despite the difficulties facing the opposition in uniting their ranks, the three main opposition parties collectively hold more seats than the Liberal Democratic Party.” It emphasized the importance of monitoring discussions on the individual positions of each party, including Komeito, to determine which side they will support in the decisive runoff.

Japanese Interest Rates

• Following Takaichi’s victory, market pricing for a 25-basis-point rate hike by the Bank of Japan in its October meeting fell from 60% to 25%.

• The yen swap market also indicated a 41% probability of a rate hike by December, down from 68% before the ruling party’s leadership election.