Dollar slips lower on rate cut expectations; euro hits one-week high

Published 16/10/2025, 09:48
© Reuters

Investing.com - The U.S. dollar drifted lower Thursday on growing expectations of further interest rate cuts by the Federal Reserve this year, while signs of French political accord helped the euro.

At 04:45 ET (08:45 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 98.342, headed for a weekly decline of 0.3%.

More Fed cuts ahead?

Market participants are becoming increasingly convinced that the U.S. central bank will follow last month’s interest rate cut with more monetary easing as data points to growth slowing in the world’s largest economy.

Fed Chair Jerome Powell warned earlier this week that the U.S. labor market is showing further signs of distress, stating that “the downside risks to employment have risen.”

Additionally, the Fed’s Beige Book – an anecdotal survey on the state of the U.S. economy – pointed to a slight loss of momentum in activity over the past eight weeks.

“Last night’s release of the Fed’s Beige Book suggests the Fed will have enough evidence to cut rates at the end of the month – even if official data releases remain suspended because of the government shutdown,” said analysts at ING, in a note.

Markets are currently priced for a quarter-point cut at the October 28-29 Fed gathering and another at the following meeting in December, followed by three more cuts next year, according to LSEG data.

The central bank last month cut borrowing costs for the first time since December, reducing the federal funds target range to 4%-4.25%.

Traders are also focusing on the trade spat between the world’s biggest economies, with Presidents Trump and Xi set to meet on the sidelines of the APEC summit in Korea at the end of October, before the Nov. 10 deadline for the 90-day truce on tariffs.

“The question for financial markets is whether China’s proposed export controls on rare earths are merely part of a bargaining ploy to achieve greater concessions from the U.S. Or really whether it is a threat which would stick and greatly disrupt global supply chains, given rare earths’ role in products like semiconductors,” ING added.

Euro climbs to one-week high

In Europe, EUR/USD traded 0.1% higher to 1.1659, climbing to a one-week high with Prime Minister Sebastien Lecornu expected to survive two no-confidence votes later Thursday after agreeing to delay pension reform, a key demand from the Socialist Party.

“The euro and French government bonds see this as good news for the short term, although for the longer term the reversal of pension reforms merely makes the job of fiscal consolidation that much harder,” ING said.

“It’s hard to see EUR/USD breaking above the 1.1685/1730 area in the near term. However, the longer EUR/USD can consolidate here, the closer it comes to the seasonally bullish period of November and especially December. We retain a 1.20 year-end call.”

GBP/USD traded 0.3% higher to 1.3436, after data released earlier Thursday showed that the U.K. economy returned to modest growth in August. 

Data released earlier Thursday by the Office for National Statistics showed that U.K. gross domestic product grew by 0.1% in August on a monthly basis, following no growth in July. 

Yen continues to gain 

Elsewhere, USD/JPY traded marginally lower at 151.06, amid growing doubts over fiscal dove Sanae Takaichi’s prime ministership. 

While Takaichi was elected leader of the ruling Liberal Democratic Party, the LDP’s opposition parties were reportedly considering backing their own prime ministerial candidate. 

Long-time LDP ally Komeito also abruptly withdrew from the coalition last week, complicating Takaichi’s path to prime ministership.

USD/CNY also slipped slightly to 7.1253, with the Chinese currency steadying after a series of strong midpoint fixes by the People’s Bank sparked strong gains in the currency.

Trade tensions between Washington and Beijing remained in play, after U.S. President Donald Trump last week threatened to impose 100% trade tariffs against China. 

AUD/USD dropped 0.1% to 0.6503, following weak labor data for September. 

Australian employment growth missed expectations, while unemployment unexpectedly jumped to a four-year high. Data for August was also revised lower, pointing to a sharper decline in the labor market than previously estimated. 

The weak labor data ramped up bets that the RBA will cut interest rates in early-November, especially as it moves to avoid further employment declines. 

 

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