Dollar has second best month of 2025 on data void, hawkish Fed
[NEW YORK] The dollar wrapped up its second best month of the year as lack of official data muddies the outlook for the US economy and the Federal Reserve’s interest rate path.
The Bloomberg Dollar Spot Index advanced for a third day on Friday (Oct 31), bringing October’s gain to 1.7 per cent. The greenback got a boost this week when Fed chair Jerome Powell said that another rate cut this year is far from certain. Meanwhile, the dollar’s peers from developed countries – namely the euro, British pound and Japanese yen – were bogged down by their domestic troubles.
“We expect the dollar rally to continue for a little while longer with no major US data releases and focus remaining on the world outside,” said Jayati Bharadwaj, a strategist at TD Securities. “There are a lot of fiscal and electoral concerns – starting with France then Japan then UK.”
This year has been a generally bad one for the world’s reserve currency. A gauge of the dollar posted its worst first-half performance since 1973 as US tariff policies sent shock waves through the US$9.6 trillion-a-day foreign currency market. This month’s rise pares the dollar’s annual loss to just under 7 per cent.
But the federal government shutdown – now on day 31 – is giving the dollar a lift. It’s not clear when key economic indicators will be available between now and the Fed’s next meeting in December.
“The lack of US data made it difficult for investors to get a sense of the direction of the US economy,” said Paresh Upadhyaya, Pioneer Investments director of fixed income and currency strategy, citing it as one of the reasons for the dollar’s advance in October. “I see signs the US economy will trough in the fourth quarter and upside risks to growth in 2026.”
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
And some dollar bears are shifting views. Morgan Stanley strategists turned neutral on the currency Thursday, citing “resilient US growth and a potential rise in Fed trough rate pricing”. They are no longer recommending long euro or yen positions against the greenback.
Several US central bank officials said after the Fed meeting they did not support a decision to cut interest rates this week, underscoring Powell’s warning Wednesday. Interest-rate swaps are now pricing a roughly 50-50 chance that the Fed will cut in December, compared to nearly fully priced in before the meeting.
In Europe, the UK government is risking raising income taxes to fill a growing hole in the public finances while fiscal woes in France led Fitch Ratings and S&P Global Ratings to downgrade that country’s sovereign debt. In Japan, the new Prime Minister Sanae Takaichi ordered an economic package amid rising cost of living, contributing to the yen’s drop as investors expect bigger government spending.
Meanwhile in the US, the Fed lowered rates by a quarter point, matching expectations, as the European Central Bank and the Bank of Japan (BOJ) maintained rates this week.
“Foreign developments have driven most of the dollar strength in recent weeks, but hawkish policy shocks have played an important domestic role as well, though admittedly we did not expect this to be as relevant as it turned out to be,” Goldman Sachs strategists including Kamakshya Trivedi wrote in a note on Friday.
The euro fell to its lowest level since early August, trading around US$1.1528 on Friday, while the pound touched its weakest point since April before paring its loss. On Thursday, the yen touched the lowest level against the dollar since February as the BOJ’s lack of hawkish signals weighed on the currency.
Asian currencies were also among the worst performers against the dollar this month. The yen was by far the biggest loser after tumbling about 4 per cent against the greenback. South Korea’s won, one of the most risk-sensitive currencies in the region, weakened about 1.8 per cent as jitters around Seoul’s US$350 billion investment pledge to the US dented sentiment.
“Short-term interest rate changes appear to be the biggest driver of depreciation pressure as Asian central banks have cut rates more aggressively relative to the Fed,” Claudio Piron, emerging Asia fixed-income strategist at Bank of America, wrote in a note.
Traders are also expecting further gains in the dollar toward year-end and into early 2026. One-month risk reversals on the dollar gauge are now at the most bullish level since mid-October, while three-month risk reversals are also pointing to greenback strength. BLOOMBERG
Share with us your feedback on BT's products and services
