Recent changes in the US Dollar (USD) show a shift away from the previous view on short-dollar trades. Other safe-haven currencies like the euro (EUR), Japanese yen (JPY), and Swiss franc (CHF) face domestic challenges, making them less appealing compared to the dollar. Gold’s recent rise indicates that the dollar may not be the first choice for investors looking for safety. However, a US government shutdown could lessen negative economic data that impacts the USD. The yen is performing well against G10 currencies, but we haven’t seen a major shift from USD to JPY for funding. The US government shutdown continues without resolution, but the Bureau of Labor Statistics is preparing to release the September CPI report. A 0.3% month-on-month core CPI increase is expected, which could lead to a rate cut on October 29. Today, the USD may stabilize but remains at risk of corrections.

Market Dynamics and Business Deals

In Canada, rising unemployment rates suggest more interest rate cuts may be on the way. US tariffs, an important part of foreign policy, are still unchanged and significant. Coinbase and Mastercard are competing to acquire stablecoin firm BVNK, valued between $1.5 billion and $2.5 billion. These developments highlight ongoing market changes and the need for careful interpretation of economic data. There is a clear shift away from short-dollar trades that have been popular over the past few months. The US dollar is becoming a safe-haven again due to renewed geopolitical instability and worries about European and Asian economies. The Dollar Index (DXY) has risen over 2.5% in the last two weeks, crossing the 107.00 mark. Surprisingly, the ongoing government shutdown in Washington is supporting this trend by delaying potentially negative economic data. This creates a situation where the dollar’s status as a safe haven appears stronger than its fundamentals. We witnessed a similar scenario during the 2013 government shutdown, where the dollar’s rally reversed once the government reopened. However, we should be cautious about further chasing this dollar strength. For example, the recent increase in US 2-year yield advantage over German bunds has actually diminished, suggesting that this rally is driven more by fear than by rate expectations. This makes the dollar susceptible to a quick correction if risk sentiment improves even slightly.

Upcoming Economic Reports and Their Implications

The key event to watch for is next Wednesday’s September CPI report, which will be released despite the ongoing shutdown. A core reading of 0.3% is widely expected, with an 85% chance of a Fed rate cut on October 29 according to the CME FedWatch Tool. Since a cut is already anticipated, any surprise in the inflation data could lead to significant volatility, offering opportunities for options traders. We are also monitoring the Japanese yen, which has generally performed well against most currencies apart from the dollar. The USD/JPY exchange rate’s difficulty in holding above the 150 level suggests that a large unwinding of JPY-funded carry trades is not yet taking place. This indicates that the current market movements are more about a general flight to safety than a fundamental change in funding currencies. Create your live VT Markets account and start trading now.

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