The dollar experienced a decline on Friday following U.S. President Donald Trump’s threat to increase tariffs on China, which has reignited worries regarding the potential effects of the trade war on the U.S. economy. Trump indicated the possibility of canceling a scheduled meeting with Chinese President Xi Jinping and expressed concerns, regarding what he described as China’s intentions to hold the global economy hostage, following China’s significant expansion of its rare earths export controls on Thursday. The remarks bolstered the euro and the yen relative to the dollar, whereas currencies associated with commodities and raw materials, such as the Australian dollar, experienced a decline. “Ultimately, it does create a lot of negativity for the U.S. economy,” stated Juan Perez. “Is China truly going to need to adopt a more retaliatory stance moving forward to compel the United States to engage in more favorable negotiations?” This generates significant uncertainty. The dollar index recently declined by 0.4%, settling at 98.99. The asset remains poised for a weekly increase of 1.66%, marking the most significant rise since September 2024, following the impact of fiscal concerns on the Japanese yen and euro this week.

Market participants are closely monitoring indicators regarding the timeline for the U.S. federal government to resume operations and disseminate data that will influence Federal Reserve policy decisions. The U.S. Bureau of Labor Statistics announced on Friday that it will release the consumer inflation report for September on October 24. This report will aid the Social Security Administration in calculating the annual cost-of-living adjustment for 2026.
Following the recent meeting, numerous Fed officials voiced their apprehensions regarding the risks associated with inflation. “A lot of the easing that central banks either have done, or in the case of the Fed are considering, is being done with a very finely tuned sensitivity to inflation,” stated Eric Theoret. Market participants are assigning a 97% probability to the Federal Reserve implementing a 25 basis point rate cut during its October meeting, with a 92% likelihood of a further reduction in December. This week, the Japanese currency has experienced a decline due to apprehensions regarding the Bank of Japan’s potential decision to refrain from further interest rate hikes this year, following fiscal dove Sanae Takaichi’s unexpected win to lead the ruling party. This development has heightened concerns about the necessity for Japanese authorities to intervene in support of the yen.

Japanese Finance Minister Katsunobu Kato expressed on Friday that the government is apprehensive regarding the heightened volatility in the foreign exchange market. “Today marked the inaugural instance where the Minister of Finance delivered a verbal intervention, warning against excessive fluctuations in the yen,” stated Marc Chandler. Last year, Japanese officials voiced apprehension regarding a shift that resulted in a 10 yen depreciation within a month. Chandler noted that a comparable shift today, starting from the September 17 low, would suggest unease surrounding the 155.5 yen threshold. The yen experienced an increase of 0.86% against the US dollar, reaching a value of 151.73 per dollar. However, the dollar is on track for a 2.9% weekly gain, marking its largest increase since September 2024. The yen has depreciated from 147.44 yen per dollar last Friday. Takaichi stated on Thursday her intention to avoid causing significant drops in the yen. She stated that the BOJ holds the responsibility for establishing monetary policy; however, any decision it reaches must be in accordance with the government’s objectives. She appeared poised to assume the role of prime minister in a parliamentary vote anticipated on October 15. However, the timeline is expected to be delayed following the withdrawal of support from Komeito, the junior coalition partner of the Liberal Democratic Party, thereby ending their 26-year alliance. The euro increased by 0.38% today, reaching $1.1607; however, it is on track for its largest weekly drop since July, down 1.15%, attributed to political instability in France. President Emmanuel Macron convened key political leaders for a critical meeting at the Elysee, approaching a self-imposed deadline on Friday to appoint a new prime minister. Meanwhile, the head of the central bank cautioned that political instability was undermining economic growth.

The current political stalemate has created significant obstacles in implementing a budget that emphasizes austerity, leading to heightened concerns among investors regarding France’s deteriorating deficit. This situation is compounded by indications of diminishing growth in other critical economic sectors, particularly in Germany. “The data from Germany is not favorable, and consequently, I believe this renders the euro somewhat more vulnerable to fluctuations based on the news from France,” stated Jane Foley. The Canadian dollar surged against the U.S. dollar following the release of data on Friday, which revealed that Canada’s economy experienced an unexpected increase of 60,400 net jobs in September. “The market continues to show a tendency towards cuts for Canada, although there is a noticeable reduction in the bias in that direction,” stated Theoret. The loonie was recently up 0.15% against the greenback, trading at C$1.4 per dollar.