Trump's Tariff Threats Impact Market Confidence, Dollar Index Retreats

On Friday (October 10), following U.S. President Trump's remarks on tariffs, U.S. Treasury yields fell sharply. This move injected new geopolitical risks into an already tense market.

The USD exchange rate softened in tandem with yields, causing the dollar index to retreat from its weekly high. Traders are weighing the dual impact of declining interest rate probability and increasing overseas political uncertainty.

Trump's remarks affected market risk appetite, prompting investors to turn to bonds and gold; after a brief decline in the stock market, bottom-fishing funds entered the market, pushing stock prices up. The yield on the 10-year U.S. Treasury fell 8 basis points to 4.063%, while the yield on the 2-year Treasury fell 7 basis points to 3.522%.

The current US government is in a deadlock, and the economic calendar is sparse. Affected by the government shutdown (now in its 10th day), the market remains in a state of data release interruption.

Expectations of interest rate cuts remain strong, and the U.S. dollar index has retreated from its high point.

Despite some opposition within the Federal Reserve, statements from Fed officials have reinforced the possibility of a rate cut, causing the dollar index to retreat from Thursday's two-month high to 99.33. Federal Reserve Governor Christopher Waller stated on Friday that the Fed should remain "cautious," while also confirming support for accommodative policies.

Currently, federal funds futures indicate a 95% probability of a 25 basis point rate cut in October, while the probability of another cut in December has fallen to 80%. Earlier this week, the minutes from the Federal Open Market Committee (FOMC) meeting showed that committee members generally support a rate cut, but there is no clear consensus on the pace of cuts—one reason for the uncertainty in the pace is that the government shutdown has led to incomplete inflation data.

France and Japan exacerbate global foreign exchange market volatility. Due to the increasing political turmoil in France, the euro to dollar exchange rate hovers around a two-month low of 1.15705, with an expected decline of 1.5% this week. French President Macron struggles to find a new prime minister capable of pushing through the austerity budget proposal, which undermines market confidence in the eurozone's second-largest economy.

Meanwhile, the exchange rate of the Japanese yen has slightly rebounded to 152.7 yen per dollar, but it is still under pressure. After Sanae Takaichi's victory in the political arena, market expectations for a rate hike by the Bank of Japan have cooled, and the yen is expected to fall by 3.5% this week, marking the largest weekly decline in a year. Japan's Finance Minister Kato acknowledged growing concerns about the foreign exchange market but did not propose specific countermeasures.

Market Outlook: Risks Continue to Accumulate, Dollar Faces Resistance at Breaking the 100 Mark

(U.S. Dollar Index 4-hour Chart Source: Yihuitong)

The current softening of U.S. Treasury yields, the re-emergence of geopolitical risks, and further pressure from overseas political uncertainties are all factors that may make it difficult for the U.S. Dollar Index (DXY) to successfully break through the 100 mark. This resistance level has not yet been breached, and in the absence of new economic data or a hawkish shift by the Federal Reserve, the short-term upside for the dollar is limited. Traders should pay attention to upcoming corporate earnings reports and statements from Federal Reserve officials for directional guidance.