Dollar Slips as Equity Sell-Off Weighs on Greenback

CURRENCY FUTURES

US DOLLAR: The USD index slipped, continuing a three-day decline as a pullback in equity markets weighed on the dollar. Also pressuring the dollar was data released on Thursday from Challenger, Gray, and Christmas that showed an unexpected rise in layoffs from US employers. The Challenger job cuts data showed more than 150,000 employees were laid off in October. Private data has been getting a bigger spotlight than usual due to the shutdown. Dollar weakness over the last two days follows what has been a strong rally for the greenback after the Fed tempered expectations for a rate cut in December. Limited economic data, persistent inflation, and internal divisions among policymakers have left the dollar vulnerable to volatility in response to any labor market signals from private sector reports. Fed Funds futures are currently pricing a 66% chance of a December rate cut from the Fed, close to a coin toss.

EURO: The euro edged higher against the dollar as new data out of Germany showed that German exports rose in September. Exports of goods rose 1.4% on the month, higher than forecasts of 0.5%. Exports to the US grew 12% on the month, increasing for the first time after five months of declines. Demand within the EU continued to show resilience; German exports to member states grew 2.5%, while exports to China slipped. The data signals a small rebound of the German economy after a lousy summer. Among other data out of Germany, industrial production and factory orders picked up in September, while surveys of businesses showed a slight improvement in sentiment toward the end of 2025, as the German government prepares to spend billions on defense and infrastructure next year. However, exports to the US in September were still down 14% compared with the same point last year. Retail sales across the eurozone slipped in September, falling 0.1% and missing expectations of a 0.2% rise. The ECB is experiencing a rare phase of low inflation and stable growth, and with inflation near target and a reduction in downside risks, it is in no hurry to cut rates.

BRITISH POUND: The pound slipped as markets digested comments from the Bank of England after it held rates steady yesterday but fueled speculation that a rate cut could be on the horizon in December. The Monetary Policy Committee, comprised of nine members, voted 5-4 to keep the central bank’s benchmark Bank Rate at 4.0%. A Reuters poll last week had expected a 6-3 vote. Notably, the central bank said that inflation has peaked at 3.8% and believed that it would fall in data for October and November. Governor Andrew Bailey, who voted to keep rates on hold, offered dovish remarks saying, “if progress on disinflation continues, Bank Rate is likely to continue on a gradual downward path.” A subdued economy, softer pay growth, easing services inflation, and a weakening labor market are helping reduce price pressures. However, policymakers will need time to assess how inflation progresses. Focus will now shift to upcoming inflation and jobs data for October in November, which will be pivotal in determining how the bank will move come December. Additionally, the bank will know the extent of tax increases in Finance Minister Rachel Reeves’ November budget. Markets now expect the government to unveil a significant fiscal tightening package, which will help the BoE ease policy.

JAPANESE YEN: The yen was little changed against the dollar after data showed household spending rose 1.8% in September, slowing from a 2.3% increase in August and missing forecasts of 2.5%. The miss in spending reflects earlier wage data that showed wage growth continued to fall behind consumer price growth (3.4%). Real wages, adjusted for inflation, fell 1.4% on an annualized basis, marking the ninth straight decline. For the BoJ, the wage growth outlook for 2026 will be critical in determining the timing of the next rate hike. A rise in wage income will help drive sustainable inflation, which will make it easier for the BoJ to return to policy normalization. The yen has gained some ground back against the dollar over the last two days as it has reemerged as a safe haven play following losses in the dollar and a fall in global equities.

AUSTRALIAN DOLLAR: The Aussie edged higher against the dollar, recovering some losses against a sharp fall yesterday as a risk-off sentiment took hold of the currency. Still, fundamental drivers of the currency remain supportive, as the Reserve Bank of Australia held rates steady earlier in the week and signaled that policy easing will be on hold. Higher inflationary pressures in the economy continue to persist, causing the RBA to revise its forecasts for inflation higher. Money markets are now only placing a 10% chance of a cut in December from the RBA, signaling that its easing cycle may be over as inflationary pressures in the economy begin to materialize. Meanwhile, trade balance figures showed that Australia’s trade surplus widened in September and surpassed market expectations. Exports rose 7.9% month-over-month, rebounding strongly from an 8.7% fall in August. The rebound in exports was driven by a 62.2% surge in non-monetary gold, recovering from a 47.2% plunge in the previous month. Among trading partners, exports to China rose 9.7%, while exports to the United States surged 24.4%.

STOCK INDEX FUTURES

The indexes are lower, continuing their consolidation after seeing a brief reprieve on Wednesday. Heavy selling in tech dominated market sentiment on Thursday, with the Nasdaq falling nearly 2% while the CBOE Volatility Index rose more than 10% during midday trading. The recent sell-off is indicative of what happens when weak data meets a market that is priced to perfection in regard to corporate results. Stock valuations are high, motivating some investors to sell despite solid earnings results as investors remain nervous about valuations and look to reposition portfolios.

Private economic data has been mixed; Challenger job cuts data showed a large uptick in layoffs in October, while ADP payroll figures for October beat out expectations. ISM services/non-manufacturing PMI rose to 52.4 in October, up from 50 in September and well above expectations of 50.8. The reading reflected the strongest expansion in the services sector since February, as business activity and new orders both rebounded in activity. On the employment side, the index continued to show contraction in employment, although there were no indications of widespread layoffs. Market sentiment also hinges on the Supreme Court case regarding the Trump administration’s authority to impose global tariffs.

INTEREST RATE MARKET FUTURES

Futures are higher at the front and lower at the long end following a strong rally yesterday as a risk-off sentiment took hold of markets. Expectations of a Fed rate cut in December have turned into a toss-up as private economic data paints a mixed picture on the labor market. The Challenger, Gray, and Christmas job cuts report showed that US employers announced 153,074 job cuts in October, the highest total for the month, while seasonal hiring plans were the lowest since the firm started collecting hiring plans data in 2012. Through October, employers have announced 1,099,500 job cuts, the highest year-to-date total since the pandemic, and up 44% from the 761,358 cuts announced in all of 2024. ADP payroll data surprised to the upside, while ISM services data showed a strong expansion in private sector activity and pointed to persistent inflationary pressures in the services sector. The prices index increased to 70 in October from 69.4 in September. Services sector inflation has been a concern among several FOMC members, with several signaling they would be reluctant to cut rates if services inflation remained persistent.

In Fedspeak, Cleveland Fed president Beth Hammack said she remains concerned about high inflation and believes monetary policy should be slightly restrictive to help bring inflation back to the 2% target without significantly harming employment. Hammack feels current policy is close to neutral and not clearly restrictive and does not see an urgent need for further tightening at this time.

The spread between the two- and 10-year yields rose to 53.80 bps from 52.80 bps on Thursday, while the 2-year yield, which reflects interest rate expectations, fell to 3.564%.

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