Dollar Dominance on Shaky Ground: Political Turmoil Masks Fragile Fundamentals.
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Dollar strength is politically driven, not economically justified, with turmoil in Europe and Japan boosting the DXY to multi-month highs.
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US shutdown uncertainty offers temporary support by delaying negative labour market focus but remains a risk longer term.
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FOMC minutes may reveal dovish leanings, with potential for USD weakness if more members discuss larger rate cuts.
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France faces possible snap elections, which could pressure the euro further but may see EUR/USD rebound toward 1.170 if USD softens.
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Sterling weakened amid a global risk-off mood, as investors favoured the dollar and other safe havens over the data-light UK currency.
USD: Strong Dollar, Weak Foundations
The dollar’s impressive rally this week owes less to US economic strength and more to political turbulence in Europe and Japan. With the euro and yen making up 71% of the DXY index, both currencies’ struggles have naturally boosted the greenback to its highest level since August.
Meanwhile, the ongoing US government shutdown remains unresolved. Although it’s hardly positive for the dollar, it still pales in comparison to France’s and Japan’s political disarray. The stalemate has also temporarily muted concerns about the US labour market, indirectly helping the currency hold up. Still, the real winner in this environment is gold — now at a historic $4,000 per ounce — with further upside expected.
Today’s FOMC minutes from September could challenge the dollar’s bullish run. While the market interpreted the Fed’s last rate cut as dovish, Chair Powell struck a more cautious tone, avoiding any signal of consecutive cuts. The minutes will reveal where the consensus truly lies on rates, inflation, and employment. Any hint of support for a larger 50bp cut could undermine the dollar.
Market pricing currently anticipates just 45bp of easing by December and 67bp by the end of Q1 2026 — a stance we see as too conservative. Most upcoming US events carry dovish risks, implying potential for a weaker dollar ahead.
Attention will also stay on Washington. So far, the dollar has shrugged off the shutdown drama, but signs of political compromise may offer only fleeting support before fundamentals reassert themselves.
EUR: Paris on the Brink
France once again finds itself in political limbo. President Macron has tasked the outgoing prime minister with one last attempt to unite the divided parliament and form a functioning government capable of tackling urgent budget issues. The deadline is tonight. Failure could trigger snap elections — now given a 60–65% probability by betting markets — and, though less likely, could even see Macron’s resignation discussed.
A snap vote would likely shave another 0.2–0.5% off EUR/USD, delaying fiscal clarity and increasing pressure on French bonds (OATs). Even if a new government forms, the euro’s upside looks limited given the fragile political backdrop.
However, with the dollar’s recent gains appearing overstretched and the FOMC minutes potentially softening USD sentiment, EUR/USD at 1.170 looks more likely than a slide toward 1.150 in the near term.
GBP: Pound Slips as Risk-Off Mood Prevails
The Pound to US Dollar (GBP/USD) exchange rate weakened on Tuesday, dropping around 0.4% to $1.3435, as risk aversion gripped markets.
Despite domestic uncertainty and expectations of Fed rate cuts, the dollar found support as investors flocked to safe-haven assets amid geopolitical strains in Europe and Japan. The ‘Greenback’ thus managed to hold its ground through Tuesday’s session.
Sterling, by contrast, had little to cling to. With no major UK data releases to provide direction, the pound’s movements were dictated by broader market sentiment. The cautious, risk-off tone weighed on the currency, leaving it weaker against most peers — especially the dollar, which benefitted from its traditional safe-haven appeal.