Softer US interest rates help the greenback steady

Oil and US rates are softer today and these developments have helped steady the US dollar after this week’s surge. Even with a firmer tone today, four of the G10 currencies are off more than 1% this week. The yen would have been among them, but comments earlier today from Japan’s Finance Minister Katayama played up the ongoing coordination with the US and has seen the yen rise for the first time in six sessions. 

The market is pricing in a “normal” Fed tightening cycle, in contrast to the Summary of Economic Projections, where the median dot implied a mini-cycle. We suspect the pendulum of sentiment has swung nearly as far as it might, especially given the prospect of a relatively tame PCE deflator (helped by methodological changes), softer September auto sales and slower jobs growth that will likely be reported next week. We are looking for some sign of a reversal in the price action in the foreign exchange market.  

Prices 

G10

The euro dipped briefly below $1.1360 in the North American morning and recovered slightly above $1.1390 near midday in NY amid a wave of optimism over a potential interim agreement of phased de-escalation in the Middle East war. It drifted lower and slipped below $1.1370 in quiet afternoon dealings. However, it is steadied today and is mostly trading within yesterday’s range. It has frayed the $1.14 level, where nearly 1.8 bln euros of options expire today and another 3.1 bln euros expire there on Monday and 2.4 bln euros on Tuesday. 

Our argument has been that higher US rates are driving the dollar higher broadly, including against the Japanese yen. The US 10-year yield has risen by about 20 bp since Monday and the dollar rose about three yen since last Thursday, the last day the greenback declined. The dollar poked above JPY159 yesterday for the first time since September 2. The risk/reward for short-term participants changes as the JPY160 level draws near. The media reports that Japanese Prime Minister Takaichi and President Trump spoke about weakness of the yen yesterday and Finance Minister Katayama indicated she would continue to coordinate with US Treasury Secretary Bessent. This saw the dollar retreat to almost JPY157.65, slightly below yesterday’s low (~JPY157.80). The dollar rose for the past five consecutive sessions. 

Sterling is having a tough week. It could be the worst week since mid-June, with more than a 1.1% loss. It reached about $1.3205 yesterday, its lowest level since late June. It was unable to re-enter the Bollinger Band yesterday, but it is back inside it today (lower band is ~$1.3220 today). Sterling, like the yen, has fallen in eight of the past ten sessions. Yesterday’s high was about $1.3255. Today’s high is near $1.3250. 

The Canadian dollar has trended lower. It has fallen each session this week coming into today and has fallen for the 11 of the past 12 sessions.  It finished above the upper Bollinger Band (~CAD1.4160 today) each day this week. The US interest rate premium over Canada continues to widen. The US dollar settled firmly and above the late July high (~CAD1.4130) for the first time. It has extended the gains today to CAD1.4155. The CAD1.4175-CAD1.4200 is the next target. 

The futures market remains confident that the Reserve Bank of Australia will hike rates next week. Yet, it was insufficient to prevent the Aussie from falling for the fourth consecutive session yesterday, the longest losing streak in three months and settling below the 200-day moving average since last November. It settled for the second consecutive session below its lower Bollinger Band (~$0.7020 today). It drew slightly closer to $0.7000, but it held and the Aussie recovered to around $0.7030. Yesterday’s high was near $0.7050, where options for about A$565 mln expire today. 

EM 

The Mexican peso’s drubbing continued yesterday. It is off nearly 2.6% this week with today’s 0.3% bounce. Without further recovery in North American, it will be the peso’s worst week in six months. The unwinding of dollar-funded carry trades seems to be the most significant driver. This also seems to account for the Colombian peso’s poor performance as well. It was taken for about 5.3% this week after surrendering a little more than 3% last week. 

The dollar bottomed this week on September 21 against the offshore yuan (~CNH6.6912) and reached CNH6.7200 yesterday and CNH6.7250 today. The PBOC seems to have signaled a period of consolidation for the yuan. In a statement following its quarterly meeting yesterday, it said it would “prevent the ‘herd effect’ and self-reinforcement of irrational expectations”. The mainland markets are closed today for the national holiday. 

The Indian rupee traded with a firmer bias. Net-net the rupee was essentially flat this week. The dollar settled below yesterday’s low (~INR95.83). Recall that the dollar settled near INR95.3850 at the end of August. 

Other markets

China, Taiwan, and South Korean markets were closed today. Many of the other equity markets, including Japan and India rose. The Hang Seng’s 1% loss was among the largest in the region. Europe’s Stoxx 600 is snapping a two-day slide and is up about 0.65% in late morning turnover. US index futures are up ~0.25%-0.50%. 

Benchmark 10-year yields extended their gains yesterday. Another tailed-coupon sale in the US adds to angst as the 10-year Treasury yield rose above 5.15% yesterday. Yields are narrowly mixed today. The 10-year JGB slipped about a basis point to 3.05%. It is up almost 10- bp this week. European yields are mixed, with the 10-year Gilt off a couple basis points but is still up nearly 15 bp this week.  The French 10-year yield is flat but up nearly 22 bp this week. The 10-year Treasury yield is off around 2.5 bp to near 5.17%, leaving it up 22 bp on the week. 

Gold continues to struggle in this rising interest rate environment. It is in the lower end of a two-month trading range. It enjoys a firmer today and is poking above $4300 late in the European morning. It settled near $4379 last week. Silver also has approached the lower end of its recent range (~$62.30). It also enjoys a firmer today and has neared $65 in Europe. Last week, it settled near $66.25. 

November WTI met the (61.8%) retracement target of its recent decline at its high yesterday, a little below $96.80 and approached the week’s high, recorded on Monday (~$97.20). It pulled back amid reports of US-Iran talks. Still, it finished with around a 2.65% gain. It is trading lower today but within yesterday’s range, when the low was near $91.25. It is off nearly 3.4% this week, its first weekly decline in four weeks. 

Data

The US reports August durable goods orders today, and the first decline since May is anticipated. The headline may be dragged down by a decline in Boeing orders (15 vs. 38 in July). However, excluding aircraft and defense, the median forecast in Bloomberg’s survey is for a 0.5% increase after a flat July report. Shipments of capital goods (excluding aircraft and defense are projected to rise by 0.7%, which, if accurate, would match the strongest three-month performance since August 2020. The Atlanta Fed’s GDP Now tracker will be updated after the data. The last estimate stood at 5.1%. The final September University of Michigan consumer confidence reading may be revised lower, but American consumers “reveal preferences” showed shopping continued through August, when retail sales jumped 1.2%, the most since March. 

As expected, Mexico’s central bank stood pat yesterday, leaving the overnight rate at 6.5%, where it has been since the 25 bp rate cut in May. Mexico will report August unemployment today. It has been creeping up this year after finishing last year near 2.4%. It stood at 2.9% in June and July, and may have risen to 3.0% in August, which would be the highest in three years.

The eurozone’s M3 money supply growth rose to 3.5% from 3.4% in July. Even as the ECB hiked rates this year, M3 has accelerated from 2.8% in the last four months of 2025.  At 3.5% the year-over-year pace is the fasted since May 2025. Lending to households rose 3.1% year-over-year, the same pace as in July. Lending to non-financial businesses slows to 4.2% year-over-year from 4.4%. 

The Bank of Japan released its measure of CPI that excludes the effect of subsidies and “special factors”. It rose 2.6% year-over-year. Special factors included changes in the consumption tax, education (free-of-charge policies, like free lunches, which started in April 2026), other relief measures for gasoline, gas, and electricity, and the 2021 reduction in cellphone fees. The swaps market is pricing in around a 30% chance of a hike next month and a nearly 90% chance of a hike in December.