USD: Strength by default
Section written by: George Vessey
The US dollar’s rally is being propelled by a dual engine: deteriorating conditions abroad and recalibrated expectations at home. Political instability in France and dovish pivots in Japan have weakened the euro and yen — which together account for nearly half the dollar index — giving the greenback a relative lift. But domestic momentum is now reinforcing that trend. The latest Fed minutes struck a more hawkish tone, flagging persistent inflation risks and prompting traders to dial back rate-cut bets. This shift is reflected in a flatter yield curve, with short-term yields rising on expectations of a higher terminal rate.
Still, the dollar’s ascent is less about bullish conviction in US fundamentals and more about strategic selling of its major rivals. The yen is under pressure from Japan’s softer fiscal and monetary stance; the kiwi has been hit by the RBNZ’s surprise 50bp rate cut and dovish guidance; and the euro continues to slide amid deepening political uncertainty in France. Even the pound and Swiss franc are showing signs of strain — the former vulnerable to long-end bond volatility, the latter ranking poorly on fundamentals.
With few compelling alternatives, investors are rotating out of risk and into the dollar. Volatility skews reinforce this shift: USD/JPY one-month risk reversals are nearing parity for the first time in three years, while the euro is seeing its steepest bearish tilt in three months. This alignment across key currency pairs signals a broader conviction — the dollar is being favoured not for its strength, but for the weakness surrounding it.
As for US shutdown risks, the dollar has shown resilience. Any signs of constructive political dialogue may offer only modest and short-lived support. The real story remains abroad, for now.
EUR: EUR/USD hits 1-month low
Section written by: Antonio Ruggiero
The euro remained under pressure yesterday, with EUR/USD gathering further selling momentum after breaking below support at 1.1650. The pair slid toward 1.1600 – next in line – marking a one-month low.
The drop picked up speed after some disappointing German industrial production figures came out early in the day – down 3.9% y/y and 4.3% m/m – way below expectations and adding to worries about the bloc’s biggest economy stalling. This has fueled what is shaping up to be one of the euro’s worst weekly performances against the dollar this year – down ~1% week-to-date. Not even ECB’s Muller, whose remarks signaled that inflation is near target, growth remains steady, and there’s no urgency for further rate cuts, managed to stem the euro’s decline – suggesting the move has been largely sentiment-driven.
Adding to the downtrend – and reinforcing the sentiment-driven narrative – were reports that the EU fears newly proposed US demands for trade concessions could undermine the validity and sustainability of the 15% tariff rate agreed in late July. While specifics remain unclear, the US appears to be seeking an opening to challenge EU legislation, including digital and technology rules, corporate compliance, and climate-related regulations. With the deal not yet legally binding, manoeuvre space for tweaking terms remains – offering investors further incentive to sell the euro, as they did back in late July on the premise that the bloc’s negotiating power remains limited relative to that of the US.
Then came the Fed minutes. The expected cautious tone – paired with a willingness to pursue further cuts into year-end – gave euro buyers a fundamentally justified reason to step in at the key 1.1600 level.
We expect the pair to find some reprieve over the next few days as sentiment stabilizes, helped by Lecornu’s announcement that Macron will be able to name a new premier within 48 hours – allowing, also, the Fed minutes’ mild easing inclination to better sink in.
CAD: Fiscal concerns
The USD/CAD has remained remarkably stable throughout the week, with no significant changes, as markets await tomorrow morning’s employment data. Meanwhile, the Canadian dollar has found some relief against the Euro, Yen, and Pound, driven by market attention on political instability in France and the recent unexpected election results in Japan. The USD/JPY is up by 4% over the past seven days.
Domestically, the new way Canada’s government is planning to present its finances is certainly stirring up a lot of debate. The government’s new Capital Budgeting Framework aims to separate day-to-day “operational spending” from “capital investments,” which they say will make it easier to see what they’re spending to build assets and stimulate growth. While some are in favor of the new fall budget cycle and clearer categorization, critics, including the Parliamentary Budget Officer (PBO) and taxpayer advocacy groups, are calling the new definition of “capital spending” overly broad. They worry that including things like corporate tax incentives and subsidies for research under the capital umbrella is a way to “muddy the water” and could overstate the government’s investment in real, long-term infrastructure like roads and bridges, all while trying to make the operating budget look balanced. It’s definitely a controversial accounting move that’s got people talking about transparency and accountability.
This financial debate takes place against a backdrop of increasing federal debt, which is a major concern for many Canadians. As of March 2025, General government net debt stood at approximately $1.463 trillion, with each Canadian carrying a per capita share of about 35 thousand dollars. To put that into perspective, the government’s total market debt is projected to reach $1.619 trillion by the end of the 2025–26 fiscal year and according to Fraser Institute, the federal government will have recorded its 17th consecutive budget deficit. This substantial debt load continues to drive up costs: the federal government is now expected to spend around $53.7 billion on debt servicing charges in 2024–25, slightly lower than earlier forecasts due to recent interest rate cuts. These payments represent 1.8% of GDP and account for over 10% of total budgetary revenues, making debt servicing one of the largest federal expenditures.
Gold hits $4000 for the first time in history
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Calendar: October 6-10
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
