US
The dollar index (DXY) has pulled back from its highest level since early April 2025, when President Donald Trump unveiled his Liberation Day tariffs. The USD rally was fueled by a sharp repricing in fed funds rate expectations following the hot US October CPI print and amplified by hawkish Fed rhetoric.
Nevertheless, the USD rally may have run too far, too fast. USD has overshot the level implied by rate differentials, limiting the scope for further gains in the near-term. Moreover, pricing of a jumbo 50bps fed funds rate hike in December will likely be constrained by stagnant US real wages and the resulting headwind to consumption spending.
Today’s second-tier US data (weekly jobless claims and October existing home sales) are unlikely to move the needle, leaving Fed speakers in focus. Cleveland Fed President Beth Hammack (who dissented in favor of an October hike), Fed Governor Michael Barr, Chicago Fed President Austan Goolsbee (2027 voter), San Francisco Fed President Mary Daly (2027 voter), Kansas City Fed President Jeff Schmid (non-voter), and New York Fed President John Williams.
UK
GBP largely ignored the UK’s good Q3 GDP print. Real GDP increased 0.7% q/q vs. 0.5% in Q2, matching consensus and the BOE’s forecast. Household consumption and fixed investment were the main growth drivers. September real GDP also surprised to the upside, rising 0.2% m/m (consensus: 0%) after stagnating in August, underpinned by gains in services, production and construction.
The swaps curve still implies about 70% odds of a back-to-back 25bps hike to 4.25% on December 17, and a total of 85bps of tightening over the next twelve months. That would push the policy rate well above the BOE’s estimated 2-4% neutral range, raising the risk of a sharper growth slowdown ahead. For now, resilient UK economic activity reinforces the case for additional BOE hikes which is GBP positive, especially against EUR.
JAPAN
USD/JPY tested key resistance at 160.00, putting intervention risks back in the spotlight. Indeed, Japan’s top currency official, Atsushi Mimura, warned “the currency moves over the past few days have been too fast…It’s too early to forget what happened this summer.”
As a background, Japan spent a record ¥15.4 trillion ($97bn, or roughly 10% of its FX reserves) to prop up JPY on July 30-31 and August 3. The US also stepped in, with intervention estimated at $1bn. The FX reaction was swift. USD/JPY plunged from an intra-day high of 163.74 on July 30 to a low of 155.23 on August 3 and has largely failed to sustain a break above 160.00 since.
Bottom line: USD strength keeps USD/JPY under upward pressure, but the threat of intervention tilts the risk-return against further JPY selling and should limit overshoots above 160.00.
INDONESIA
USD/IDR surged to a record high at 18256 on USD strength. IDR weakness prompted Bank Indonesia (BI) to remind market participants that it remains present in the market to maintain the stability of the rupiah exchange rate. BI has scope to cushion IDR weakness. FX reserves totaled $126bn in October (8.4% of GDP), providing a sizeable buffer against relatively modest daily spot turnover of around $7bn.
