The dollar index (DXY00) on Monday fell by -0.17%. The dollar traded lower due to reduced safe-haven demand on the preliminary US-China trade agreement.
The dollar also saw some carry-over weakness from last Friday’s Sep US CPI report of +3.0% y/y for both the nominal and core figures, which was slightly weaker than expectations of +3.1% y/y and was dovish for Fed policy.
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The dollar remains under pressure from the ongoing US government shutdown. The longer the shutdown is maintained, the more likely the US economy will suffer and the more likely the Fed will have to cut interest rates.
The dollar had some underlying support on Monday as the US 10-year T-note moved slightly lower by -0.8 bp.
The markets are pricing in a 98% chance of a -25 bp rate cut at this week’s FOMC meeting on Tuesday and Wednesday (Oct 28-29).
US and Chinese negotiators, who met over the weekend in Malaysia, said they reached a tentative trade agreement to be finalized at Thursday’s summit between Presidents Trump and Xi on the sidelines of the ASEAN conference in Malaysia. Treasury Secretary Bessent said the agreement means the US threat of a 100% tariff on US imports from China, set to start November 1, is “effectively off the table.” Meanwhile, China agreed not to restrict the export of rare earth metals for at least one year and to buy a “substantial” amount of US soybeans. The two sides also made progress on shipping fees and US demands that China crack down on the export to the US of fentanyl and precursors. The two sides may also reach an agreement that would allow US consumers to continue to access TikTok.
Treasury Secretary Bessent said on Monday that the pool of candidates for the next Fed Chair has been narrowed to Christopher Waller, Kevin Warsh, Kevin Hassett, Michelle Bowman, and Rick Rieder. President Trump is expected to announce a decision on a new Fed Chair by year-end to replace current Fed Chair Powell, whose term as the Fed Chairman ends on May 15, 2026. Mr. Powell’s separate term as a Fed Governor runs until January 2028, though he faces pressure from Mr. Trump to step down as a Fed Governor as well, so Mr. Trump can appoint a more dovish Fed governor.
EUR/USD (^EURUSD) rose by +0.15%, seeing support from dollar weakness.
The euro saw support from Monday’s +0.7 point rise to 88.4 in the German IFO business climate index, which was stronger than expectations for a +0.3 point rise to 88.0.
Swaps are pricing in a 1% chance of a -25 bp rate cut by the ECB at the October 30 policy meeting.
USD/JPY (^USDJPY) on Monday was little changed late in the afternoon. The yen saw some support from Monday’s +2.46% on the Japanese Nikkei index, which may have encouraged some Japanese investors to repatriate funds into Japanese stocks.
December COMEX gold (GCZ25) on Monday closed down -118.10 (-2.85%), and December COMEX silver (SIZ25) closed down -1.812 (-3.73%).
Dec gold prices on Monday fell to a new 2-week low, as heavy long liquidation pressures persisted following the sharp rally seen over the past two months. Precious metals prices also saw downside pressure from reduced safe-haven demand due to the US-China preliminary trade agreement.
Precious metals have underlying safe-haven support due to the ongoing US government shutdown, uncertainty over US tariffs, geopolitical risks, central bank buying, and political pressure on the Fed’s independence. In addition, recent weaker-than-expected US economic news has bolstered the outlook for the Fed to keep cutting interest rates, a bullish factor for precious metals.
Precious metals prices are under pressure from ETF outflows amid heavy long liquidation. Gold holdings in ETFs fell by a total of -0.8% as of last Friday from last Tuesday’s 3-year high. Silver holdings in ETFs fell by a total of -1.3% as of last Friday from last Tuesday’s 3.25-year high.
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