USD: a second weekly decline as yields slip back below 5%
The US dollar lost ground over the week, its second consecutive weekly decline, as a sharp fall in Treasury yields and a sell-off in technology shares outweighed a further rise in oil prices that might ordinarily have offered it some support. The dollar was weakest against the yen and the commodity currencies, while it edged higher against the euro, which says the week's move owed as much to developments elsewhere as to anything in the United States.
In the United States, the bond market set the tone. The 10-year Treasury yield fell below 5% on Thursday for the first time in around a month, having traded well above that level only a week earlier, as a sell-off in AI-related shares, led by concerns over how heavy technology spending will be financed and repaid, sent investors towards government debt. The Nasdaq recorded its sharpest daily fall in several months, and markets interpreted the combination of falling yields and falling equities as a sign that worries about growth are beginning to sit alongside worries about inflation.
The more telling point is that the dollar did not benefit from that episode. When the source of stress is US equities and the Treasury market is rallying, the dollar's yield advantage over other currencies narrows at the same moment that investors are reducing exposure to US assets, and safe-haven demand tends to flow to the yen, the franc and Treasuries themselves rather than to the currency. That is a different pattern from the one seen through much of the year, when risk aversion usually meant a firmer dollar, and it is worth watching whether it persists.
The data were mixed rather than weak. Housing starts and pending home sales both came in well below expectations, with the housing market showing the clearest strain from higher borrowing costs, while jobless claims remained low and the final reading of consumer sentiment was revised up from a very depressed preliminary level. Treasury Secretary Scott Bessent said the economy was on "the other side of the energy shock", although the market will want to see that claim confirmed in the data before it gives it much weight.
Elsewhere, oil pushed higher again into the end of the week, as early reports of a compromise proposal between Washington and Tehran faded and were replaced by reports that the United States was weighing renewed strikes on Iran. Yields rebounded towards 5% on Friday as a result, and the dollar recovered some of its losses, although not enough to change the shape of the week.
Attention now turns to a heavy week, with the Federal Open Market Committee meeting on 27 and 28 October and expected to hold, although markets continue to lean towards a further increase in December and will be watching closely for whether Chair Kevin Warsh confirms that bias. The first estimate of third-quarter GDP and September's personal income and outlays, including the PCE price index, are both released on Thursday 29 October, followed by the third-quarter employment cost index on Friday 30 October.
Taken together, the dollar enters the week with less support from yields than it has had for some time, and with the midterm elections on 3 November now close enough to add a layer of uncertainty of their own. A firm reading on inflation and wages would restore some of the rate support the currency lost this week, but the bond market, rather than the Fed, has been setting the pace.
EUR: unrest in France and a soft PMI weigh on the euro
The euro lost ground against the US dollar over the week, finishing slightly lower and as the weakest of the major currencies, and fell to its lowest level against sterling in well over a year, as social unrest in France added to concerns over the country's public finances and Friday's purchasing managers' indices pointed to slowing activity across the euro area. The decline against the dollar was modest, but the broader picture was of a currency that could not share in the greenback's weakness.
In France, cost-of-living protests that turned violent over the preceding weekend continued into the week and spread to other parts of Europe, adding another layer of uncertainty to an already fragile political and fiscal backdrop. The 10-year French government bond yield touched 5%, its highest level in more than two decades, and the gap over German yields widened to levels not seen in many years. Markets interpreted the unrest as raising the odds of political change and of looser fiscal policy, at a time when it remains unclear whether the 2027 budget can pass parliament at all.
The mechanism is worth spelling out. Higher yields usually support a currency, since they offer investors a better return for holding it, but when yields rise because investors are demanding more compensation for the risk of lending to a government, the higher return is a price for that risk rather than a reward, and capital tends to leave rather than arrive. A fiscal risk premium of that kind is also one a central bank cannot easily offset, which is why the euro has struggled even as the European Central Bank has talked about tightening.
Friday's flash purchasing managers' indices added to the gloom. The composite measure fell to 51.9 in October against expectations of 52.7, with the slowdown concentrated in France, where private-sector activity slipped back into contraction, while German manufacturing held up well. Price pressures remained elevated, however, and European gas prices rose sharply over the week, which leaves the central bank caught between two competing forces: inflation driven by energy, and an economy that is losing momentum.
Attention now turns to the European Central Bank's meeting on 28 and 29 October, with the decision and President Christine Lagarde's press conference on Thursday. The Bank is widely expected to hold, so the focus will be on whether Lagarde keeps December open for an increase or leans towards patience given the softer activity data, a question on which economists remain divided.
Overall, the euro's direction depends less on the Bank than on Paris for the moment. Until the budget debate shows some sign of resolution, and the unrest on the streets subsides, the single currency is likely to remain sensitive to every move in French yields, and slow to benefit from any further weakness in the dollar.
GBP: firmer inflation keeps a November increase on course
The pound pushed higher against the US dollar over the week, its second consecutive weekly gain, and rose to its strongest level against the euro in well over a year, as firmer than expected inflation figures and an upbeat set of purchasing managers' indices reinforced expectations of an increase from the Bank of England in November. Sterling briefly reclaimed the US$1.34 area on Tuesday, although it struggled to hold above that level for the rest of the week.
In the United Kingdom, Wednesday's figures showed consumer price inflation rising to 3.5% in September against expectations of 3.4%, up from 3.1% in August, with transport the largest contributor as diesel prices climbed to their highest in more than four years. Services inflation also rose, which matters more than the headline because services prices are where the Bank looks for evidence that an energy shock is feeding into wages and broader pricing. Markets interpreted the figures as all but confirming an increase to 4.00% on 5 November, although the odds of a second move in December actually fell.
The rest of the week's data painted the economy as resilient rather than robust. Tuesday's labour market figures were mixed, with the unemployment rate unexpectedly edging lower even as the claimant count rose by more than forecast, while Friday's flash services index rose to 53.1 against expectations of 51.8. Retail sales, by contrast, fell more than expected in September and the GfK measure of consumer confidence slumped, which suggests that households are feeling the squeeze from fuel prices even as businesses report firmer activity.
The fiscal picture is the other half of the story. Public borrowing is running above the Office for Budget Responsibility's forecasts, and the Autumn Budget on Wednesday is widely expected to include tax increases. That matters for the currency in two directions at once: a credible plan that steadies the gilt market would remove a source of pressure that has weighed on sterling for months, but tax rises also slow demand, and a weaker economy gives the Bank less reason to keep tightening, which is why the market's reaction will depend as much on the detail as on the headline numbers.
Attention now turns to Wednesday 28 October, when Chancellor John Healey delivers his first Budget, the domestic event most capable of moving sterling before the Bank of England's decision and Monetary Policy Report on 5 November. The domestic data calendar is otherwise light, which leaves the pound trading on the Budget and on the Federal Reserve and European Central Bank decisions later in the week.
For now, the pound has the more constructive backdrop of the European currencies, with the inflation data and the rate story pointing the same way. The risk, as it has been for some weeks, is that the gilt market rather than the Bank sets the tone, and the Budget will be closely scrutinised for whether it calms that market or unsettles it.
JPY: safe-haven demand returns as equities stumble
The yen regained ground against the US dollar over the week, with the pair falling to its lowest level in around a month late in the week, and the yen also firmed against the euro, as a sharp sell-off in technology shares and a fall in Treasury yields revived safe-haven demand. The pair recovered towards 157 on Friday as yields rebounded, but the week marked a clear break from the pattern of recent months, in which a weak yen had been one of the market's more dependable trends.
Thursday was the turning point. As AI-related shares fell heavily in the United States and the 10-year Treasury yield dropped below 5%, the yen led the major currencies, and markets interpreted the move as growth concerns beginning to replace inflation fears as the dominant theme. Lower US yields narrow the gap that has made borrowing in yen to invest elsewhere so attractive, and when that gap shrinks at the same moment that risk appetite fades, investors close those positions and buy back yen, which tends to make the currency's moves sharper than the news alone would suggest.
In Japan, Friday's national consumer price index showed headline inflation rising to 2.1% in September, in line with expectations, while the measure excluding fresh food and energy rose by more than expected to its strongest level in around ten months. A Reuters poll found most economists expect the Bank of Japan to raise its policy rate before the end of the year, with a large majority of those favouring December rather than this month's meeting, and Finance Minister Satsuki Katayama said she sees no gap between the government and the Bank. Wednesday's trade figures were less encouraging, with exports growing more slowly than expected and the deficit wider than forecast.
The government is also reported to be weighing an end to gasoline subsidies from December, and the mechanics of that are worth noting. Subsidies hold down the measured price of fuel, so removing them lifts headline inflation almost immediately without any change in underlying demand, and a central bank that is already close to tightening would then face a higher inflation rate at precisely the moment it is deciding whether to act. In other words, a fiscal decision could do some of the Bank's persuading for it.
Attention now turns to the Bank of Japan's meeting on 29 and 30 October, with the Statement on Monetary Policy and the Outlook Report both due on Friday 30 October, alongside the Tokyo consumer price index for October. With the market firmly expecting no change this month, the Outlook Report's assessment of underlying inflation will be closely scrutinised for any sign that December is being prepared.
Offshore, the Federal Reserve's decision on Wednesday and US growth and inflation data on Thursday will matter as much for the pair as anything in Tokyo, given how much of this week's move came from the US side. A renewed fall in risk appetite would likely bring further safe-haven demand, whereas a rebound in Treasury yields would quickly revive the rate gap that has weighed on the yen for most of the year.
CAD: oil and a hawkish shift in pricing lift the currency
The Canadian dollar regained ground against the US dollar for a second consecutive week and finished among the strongest of the major currencies, as higher oil prices and a decisive shift in rate expectations ahead of next week's Bank of Canada decision outweighed lingering concerns over the labour market. A softer US dollar and a fall in Treasury yields helped along the way.
Domestically, the week began with Monday's consumer price index, which showed headline inflation edging higher in September while the Bank's preferred core measures were softer, and with the Bank's Business Outlook Survey, which mattered more. Firms' inflation expectations rose in September to near their spring highs, half of those surveyed said they plan to pass cost increases on to their customers, and the largest share since the question was introduced said they could not estimate when inflation would return to the 2% target. Thursday's producer price figures showed a sharp rise in raw materials costs, and Friday's retail sales rose solidly in August, close to expectations.
Markets interpreted the survey as tipping the balance towards an increase on 28 October, and pricing moved sharply in that direction, with several of the major Canadian banks changing their forecasts to a move at this meeting. The view is not unanimous: some economists argue that soft domestic demand and a weak labour market limit the inflation risk, and that an increase now would be driven by caution rather than necessity.
The reason business expectations carry so much weight is that they are the channel through which an energy shock becomes general inflation. When firms expect their own costs to keep rising and plan to pass them on, they raise prices in advance, and those price increases feed into what workers demand in wages, so that expectations can end up producing the very inflation they anticipate. That is the risk Governor Tiff Macklem had in mind when he warned the previous week that the Bank's patience with higher energy prices has its limits.
Elsewhere, crude rose to its highest level in several months on renewed tensions around Iran, improving Canada's terms of trade as a major energy exporter, and reports late on Friday that Washington might lift some of its tariffs on Canadian goods offered a further potential boost, although that remains to be confirmed.
Attention now turns to Wednesday 28 October, when the Bank of Canada announces its decision and publishes its Monetary Policy Report, on the same day as the Federal Reserve's decision. Payroll employment figures follow on Thursday, alongside the Bank's annual economic conference, and August GDP is released on Friday 30 October.
An increase accompanied by guidance that leaves room for more would likely extend the currency's recovery, particularly if oil holds its gains. Conversely, a decision to hold would unwind some of the positioning built up this week, and would leave the Canadian dollar more dependent on oil and on any easing in trade tensions than on the rate story.
CHF: the franc rediscovers its safe-haven role
The Swiss franc pushed to its strongest level against the US dollar in around a month on Thursday, before giving back part of those gains on Friday as Treasury yields rebounded, and finished the week firmer against the euro, which fell to its weakest level against the franc in several months. After a long stretch in which the franc behaved more like a funding currency than a refuge, the week brought a clear return of safe-haven demand.
The trigger was a combination of a sell-off in global equities and renewed concern over government debt in the larger economies, with French yields at their highest in more than two decades and Treasury yields swinging sharply. Switzerland stands out in that comparison, with public debt a fraction of the size of its peers, and Commerzbank noted that "Switzerland's public finances are much more solid than those of most other industrialised countries." Markets interpreted the franc's move as a reminder that, when the question is the creditworthiness of governments, a currency backed by a conservative fiscal record has an appeal of its own.
In Switzerland, Thursday's summary of the September monetary policy discussion explained the franc's earlier weakness. The Swiss National Bank attributed the decline of around 3% in trade-weighted terms since June to wider interest rate differentials, and to low volatility that made the franc an attractive currency in which to fund carry trades, noting that there had been little safe-haven buying over that period. It also judged that an "increased willingness to intervene is no longer necessary", while keeping the option of acting in currency markets if required.
That is the mechanism worth understanding. When investors borrow in a low-yielding currency such as the franc to buy higher-yielding assets elsewhere, the trade works well in calm markets, but when volatility rises and those assets fall in value, the positions are closed and the borrowed francs must be bought back, which pushes the currency higher at the very moment that genuine safe-haven buyers are also arriving. In other words, the franc's two roles can reinforce each other on the way up, which is why its moves in a risk-off episode can be sharper than the news alone would suggest.
Attention now turns to a week without major domestic releases, which leaves the franc trading on the European Central Bank's decision on Thursday, the Federal Reserve on Wednesday and the Bank of Japan on Friday, as well as on the course of the French budget debate and the situation in the Gulf. The Swiss National Bank's next assessment is not until December.
Stepping back, the franc's recovery this week rested on a shift in mood rather than on anything the Swiss National Bank did. A renewed sell-off in equities or a further rise in French yields would likely bring more safe-haven demand, whereas a return to calm markets would quickly revive the carry-trade pressures the Bank described.
NZD: a softer inflation print leaves an October increase in view
The New Zealand dollar regained ground against the US dollar over the week, rising for several consecutive sessions to its strongest level in around a month on Wednesday, before giving back some of those gains after Thursday's inflation figures and the sell-off in global equities, and it lost ground against the Australian dollar, which was the stronger of the two currencies on the week. The early gains reflected growing confidence that the Reserve Bank will raise rates on 28 October, along with a softer greenback.
Domestically, the third-quarter consumer price index showed annual inflation easing to 3.7% from 4.1%, against expectations of 3.8% and slightly below the Reserve Bank's own projection. Markets interpreted the figure as soft enough to take some of the edge off the rally, but not soft enough to derail an increase, and economists continue to expect a move before the 7 November election, with inflation still well above the 1% to 3% target band and widely expected to rise again in the coming quarter as fuel prices feed through.
Chief Economist Paul Conway had already described this month's decision as "wide open" while saying the path is most likely upward, and he named both oil prices and the exchange rate as upside risks to inflation. That second point is worth drawing out, because it creates an unusual dynamic. A weaker currency raises the cost of imported goods and fuel, so part of the Bank's concern has been the New Zealand dollar's slide, but the more the currency rises in anticipation of an increase, the more it eases one of the very pressures the increase is meant to address. In other words, the market's own enthusiasm can weaken the case it is pricing.
Elsewhere, the offshore backdrop turned less supportive late in the week, with the New Zealand dollar among the weaker currencies on Thursday as equities fell. Markets also continue to expect the Federal Reserve to raise rates in December, which would offset some of the effect on the rate gap of any move from Wellington.
Attention now turns to Wednesday 28 October, when the Reserve Bank announces its decision at 2pm, with an increase in the official cash rate from 2.75% to 3.00% widely expected. Across the Tasman, Australia's third-quarter consumer price index is released the same morning, and the Federal Reserve's decision follows overnight.
An increase accompanied by guidance that keeps further tightening on the table would likely give the currency renewed support, particularly against the Australian dollar if the Australian inflation data disappoints. Conversely, an increase framed as one and done, or a decision to wait until after the election, would likely see the New Zealand dollar give back much of this week's gains.