The U.S. dollar weakened on Thursday as renewed Sino-U.S. trade tensions rattled global markets and investors ramped up expectations that the Federal Reserve will cut interest rates before the end of the year. Meanwhile, political uncertainty in France and Japan continued to shape global sentiment, keeping traders cautious amid an already turbulent economic landscape.
Dollar Index Dips Amid Rising Trade Frictions
The U.S. Dollar Index (DXY), which tracks the greenback against six major currencies, slipped 0.16% to 98.512, heading for a weekly loss of 0.33%. Analysts attributed the decline to the escalating U.S.-China trade dispute, which has renewed fears of a slowdown in global growth.
Investor sentiment soured this week after Washington condemned Beijing’s decision to expand rare earth export controls, calling the move a potential threat to global supply chains. In response, China’s Commerce Ministry defended its decision, accusing the U.S. of hypocrisy due to its own restrictions on Chinese goods and technology firms.
The tit-for-tat measures have weakened confidence in the dollar, as investors flock to safer currencies such as the Swiss franc and the Japanese yen.
Euro, Yen and Yuan Strengthen Against the Dollar
The euro climbed 0.12% to $1.1661, hitting a one-week high as traders turned their attention to France’s ongoing political crisis. French Prime Minister Sebastien Lecornu is expected to survive two no-confidence votes, calming fears of immediate instability within the eurozone’s second-largest economy.
The Japanese yen briefly strengthened to 150.51 per dollar—its strongest level in a week—before stabilizing at 151.04. Political developments in Tokyo are also influencing investor behavior, as the ruling Liberal Democratic Party (LDP) begins coalition talks with the right-wing Japan Innovation Party (Nippon Ishin no Kai).
These negotiations could pave the way for Sanae Takaichi to become Japan’s first female prime minister, though uncertainty persists after the LDP’s junior partner Komeito exited their long-standing coalition last week.
In China, the yuan firmed to a two-week high against the U.S. dollar after the People’s Bank of China set its strongest daily midpoint in a year, signaling efforts to stabilize the currency amid trade and geopolitical pressures.
Trump-Xi Meeting Could Ease Tensions
Despite the rising trade friction, there remains hope for diplomacy. U.S. Treasury Secretary Scott Bessent confirmed that President Donald Trump still expects to meet Chinese President Xi Jinping later this month in South Korea.
The meeting could mark a pivotal moment in the prolonged economic standoff between the world’s two largest economies. Analysts believe the upcoming talks could result in an extension of the six-month trade truce, which currently maintains lower tariffs and limited rare earth exports between the two sides.
“If the meeting goes ahead, some of the latest measures could be toned down or even unwound and presented as successful deliverables,” said Vasu Menon, managing director of investment strategy at OCBC.
Joseph Capurso, head of foreign exchange strategy at the Commonwealth Bank of Australia (CBA), noted that while a “grand bargain” to end the trade war remains unlikely, a temporary extension of the truce would still be a positive outcome.
“An extension, rather than a sweeping trade deal, is probably the most realistic second-best outcome,” Capurso said. “Escalation would only hurt both economies.”
Fed Policy Outlook: Markets Price in Rate Cuts
With the U.S. government shutdown entering its third week and official economic data delayed, traders are increasingly turning to Federal Reserve communications for direction.
Fed Chair Jerome Powell struck a dovish tone earlier this week, acknowledging that the U.S. labor market remains sluggish and suggesting the central bank could still consider another interest rate cut this year.
As a result, futures markets are now pricing in 48 basis points of easing in 2025—reflecting strong investor confidence that the Fed will deliver cuts at one or both of its remaining policy meetings this year.
“With the Fed flying blind due to the data blackout, the longer the absence, the bigger the risk of a volatile reaction once data returns,” warned Thomas Poullaouec, portfolio manager at T. Rowe Price.
Commodity Currencies and Safe Havens React
The Australian dollar (AUD) fell 0.36% to $0.64875 after fresh data revealed that Australia’s unemployment rate reached a nearly four-year high in September. The weak labor figures strengthened the case for further monetary easing by the Reserve Bank of Australia (RBA).
Given Australia’s close trade ties with China, the Aussie often acts as a proxy for global risk appetite. The current trade tensions have caused notable volatility in the currency this week, with traders pivoting toward traditional safe-haven assets.
The Swiss franc, another major safe-haven currency, remained firm at 0.7955 per U.S. dollar, while gold prices held steady amid global uncertainty.
Political Instability Adds to Market Jitters
Beyond trade and monetary policy, global political instability is increasingly shaping investor sentiment.
In France, Prime Minister Lecornu’s fragile minority government continues to face resistance in parliament as it pushes forward with deficit-reduction measures and pension reform. The current unrest marks one of the most turbulent political periods in modern French history, dividing the National Assembly into multiple ideological blocs.
Meanwhile, in Japan, coalition negotiations remain fluid. With Takaichi leading the LDP and seeking alliances to secure a majority in parliament, markets are watching closely to gauge whether her potential leadership could stabilize Japan’s policy outlook or trigger further political friction.
“The cost of becoming prime minister is likely to be looser fiscal policy,” Capurso of CBA added. “There’s little appetite for monetary tightening under current political and economic conditions.”
Global Outlook: Dollar’s Fragile Dominance
Analysts say the U.S. dollar’s defensive posture will likely persist until more clarity emerges on both the U.S.-China trade front and Federal Reserve policy direction.
If trade tensions worsen, investors could continue shifting toward safe-haven currencies like the yen, franc, and gold, putting additional downward pressure on the greenback. However, any signs of progress between Washington and Beijing—or confirmation of Fed rate cuts—could reignite risk appetite and stabilize global markets.
For now, the currency markets remain cautious, with political drama, trade disputes, and economic uncertainty defining a tense October trading environment.
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