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Overview: The dollar is heavy today. It is weaker against nearly all the world's currencies. The ongoing elevated trade tensions between the US and China continue to be the main talking point today. US rates were soft before Fed Chair Powell spoke yesterday and remain soft, at the same moment when market participants seem to be demanding a higher premium of hold dollars given the policy uncertainty, not to mention the continued shutdown of the federal government, with both sides showing little movement. Contrary to expectations from many, China has not weaponized the exchange rate and instead set the dollar's reference rate at its lowest level since last November. Meanwhile, gold continues to rise and reached a new record slightly beyond $4218 today. It settled last week around $100 lower. 

Bonds and equities are rallying today, too. Benchmark 10-year yields are mostly 2-3 bp lower in Europe, though UK's 10-year Gilt yield is off more than four basis points to below 4.55%. The French political impasse appears to be lifting, and its premium over German has narrowed to around 78 bp, the least since early September. The 10-year Treasury yield is hovering slightly above 4%. Most of the major equity markets in the Asia Pacific region rallied more than 1% today, with South Korea's Kospi leading the way with almost a 2.7% surge. Europe's Stoxx 600 is up almost 0.7% and US S&P futures are up more than 0.5% and the Nasdaq futures are up nearly 0.8%. WTI is consolidating quietly in narrow range around yesterday's settlement (~$58.25, basis December). 

USD: The Dollar Index remains in the range set last Thursday, roughly 98.70-99.55. After approaching the upper end yesterday (almost 99.50), it was sold to a four-day low today at the lower end of the range, near 98.75. A common narrative is that Fed Chair Powell was dovish in his comments yesterday. Maybe, but the odds of a cut later this month actually slipped ever so slightly in the Fed funds futures market yesterday (to 97.6% from 99.2%). A meaningless change, which is to say Powell did not tell the market anything new. Still, the US two-year yield posted its lowest settlement of the year yesterday (slightly above 3.48%) and is still heavy today. The 10-year yield remains pinned near 4.0%. Meanwhile, the US federal government remains closed, and no end appears in sight. The Fed's Beige Book may have added significance given the dearth of official data. Moreover, Fed Chair Powell often refers to it. Trade tensions between the US and China continue to run high, with President Trump threatening not to buy China's used cooking oil in retaliation for Beijing not buying US soy. 

EURO: The euro held last Thursday's low by 1/100 of a cent yesterday, according to Bloomberg slightly below $1.1545 before recovering and settling above $1.16, where large options expire today and tomorrow. It has entered but has not overcome the band of resistance seen in the but resistance in the $1.1630-55 area. Above there the next target is $1.1690-$1.1700. There are two knocks on the euro. The first is weak economic data. The four largest members of the eurozone reported declines in August industrial production. The 1.2% decline in the aggregate report released earlier today is the largest decline since April. The second knock has been the political instability in France, and this may be easing. French Prime Minister Lecornu delivered the budget yesterday with compromises on the controversial pension reform and the extent of fiscal consolidation next year. It looks as if these compromises will let Lecornu survive longer than his last stint. Meanwhile, Russia's hybrid war in Europe continues. The single currency also looks vulnerable to a US decision to send Tomahawk missiles to Ukraine. Since the missiles reportedly need US soldiers to operate, it is understood to be an escalation of the conflict.

CNY: The dollar was turned back from almost CNH7.15 yesterday and encouraged by the lower fix by the PBOC today and the broadly softer tone, fell to about CNH7.1250 today, the lower end of its recent range. The PBOC set the dollar's reference rate at CNY7.1007 on Monday, CNY7.1021 yesterday, and CNY7.0995 today, its lowest level since last November. Earlier today, China reported that deflationary forces slackened a little in September. CPI fell 0.3% year-over-year. It was -0.4% in August and flat in July. Many still cite weak demand for the deflation in consumer prices but the main culprit is food, (-4.4% year-over-year. Excluding food and energy, China's CPI is 1%. It was 0.6% at the end of last year. Deflation in producer prices slowed to -2.3% from -2.9% in August. That is the least deflation since February. China also reported its lending figures for September, which were a little below expectations. 

JPY: Yesterday, the greenback traded on both sides of Monday's range (~JPY151.65-JPY152.45) but settled within the range, JPY151.15-JPY153.25. Today, it has fallen to JPY150.90, a six-day low, but has recovered to around JPY151.40 in European turnover. There are options for around $955 mln at JPY151.50 that expire today. The Diet vote for prime minister will take place on October 21. The only way Takaichi looks to be defeated in her bid is if the opposition parties can overcome their programmatic differences and agree on a single candidate. If no candidate gets a majority, there is a run-off between the top two. Regardless of the outcome, passing legislation in the Diet will be more difficult given the breakdown of the LDP-Komeito alliance. If Takaichi was more resolute on campaign finance reform, which Saito, the head of the Komeito Party, blames for recent electoral losses, she could have kept the coalition intact. 

GBP: The rise in UK unemployment pushed sterling to its lowest level since August 1 yesterday, almost $1.3250. It recovered to around $1.3335 yesterday and approached $1.3375 today. A move above $1.3390 could target $1.3420 area which holds the 20-day moving average and the (61.8%) retracement of this month's losses. Tomorrow, the UK reports August GDP and details. The economy stagnated in July, and the median forecast in Bloomberg's survey is for 0.1% growth in August. Better industrial output (0.2% vs. -0.9% in July) and a smaller trade deficit will offset a contraction in construction (-0.2% vs. 0.2% in July) to lift the economy.

CAD: The broad risk-off environment weighed on the Canadian dollar yesterday. The greenback rose to CAD1.4080, its best level in six months, where sellers were lurking and pushed it back to CAD1.4040. Initial support is seen in the CAD1.4025 area, which is holding so far today. In the softer US dollar context, the Canadian dollar is the weakest of the G10 currencies today, barely better than flat in late European morning turnover. Canada is subject to substantial and escalating US tariffs on lumber - currently facing a combined rate of approximately 45% on softwood lumber when including both the longstanding anti-dumping/countervailing duties and the new October 2025 10% tariff. Additional 25% tariffs apply to wood furniture products like cabinets and vanities.

AUD: Rising US-Chinese tensions took a toll on the Australian dollar. Since last Thursday's high, when Beijing announced the broadening and tightening of rare earth and EV battery restrictions, it has fallen from around $0.6610 to $0.6440 yesterday. It is one of the weakest currencies among the G10 in this period. For the second time in the past three sessions, the Aussie settled below its lower Bollinger Band (which is near $0.6485 today). It has come back better bid today to probe yesterday's high around $0.6520. The week's high is slightly below $0.6535, and it looks poised to challenge it in North America today. It is the halfway mark of this month's decline. There are options for a little more than A$500 mln at $0.6550 that expire today, and the (61.8%) retracement is slightly above $0.6555. The first thing tomorrow, Australia reports September jobs data. The median forecast in Bloomberg's survey looks for a 20k increase in overall jobs after losing 5.4k in August (of which almost 41k were full-time posts). The unemployment rate is expected to rise to 4.3% from 4.2%, matching the cyclical high recorded in June. 

MXN: The greenback found resistance yesterday as it approached the pre-weekend high (~MXN18.6375). It retreated back to a little below MXN18.45 as the North American session progressed. The dollar has been sold slightly through MXN18.44 today. Risk-off weighed on the peso and Latam currencies in general, though most emerging market currencies struggled. Three of the worst performing emerging market currencies yesterday were from Latam (Chilean peso ~-0.70%, Brazilian real ~-0.70%, South African rand ~-0.60%, and Mexican peso ~-0.50%). The dollar straddled BRL5.50, while also holding below last Friday's high slightly above BRL5.52. Brazil reports August retail sales today. A 0.2% increase is expected, which if it materializes would be the first increase since March. 

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