Dollar Holds Firm Amid Global Political Upheaval and U.S. Policy Uncertainty
- admin cys
- Oct 15
- 4 min read
A Report by CYS Global Remit Counterparty Sales & Alliance Unit
USD/SGD | 1.2894 – 1.2902 |
The U.S. dollar held its ground on Thursday, steadying after a volatile week marked by heightened political turmoil in both Europe and Japan and lingering uncertainty surrounding a prolonged federal government shutdown in Washington. Investors are now grappling with a complex global picture — one where domestic political fractures, divergent monetary policy paths, and delayed U.S. economic data have combined to stall decisive market moves.
While the greenback’s resilience reflects its entrenched status as the world’s safe-haven currency, the broader dynamics unfolding in Europe and Asia suggest that political instability, rather than economic fundamentals alone, is increasingly driving short-term currency movements.
Europe’s Renewed Political Crisis and the Euro’s Vulnerability
The euro weakened modestly, slipping by 0.1% to $1.1622, as investors once again turned their attention to France — the epicentre of the latest bout of European political anxiety. The resignation of Prime Minister Sébastien Lecornu, following the swift collapse of his newly formed government, has left French President Emmanuel Macron scrambling to restore stability in Europe’s second-largest economy. The political turbulence has fuelled speculation about whether Macron might be forced to call a fresh snap parliamentary election, a move that could deepen existing legislative gridlock and delay key policy initiatives. For now, the Élysée Palace has ruled out such a step, emphasizing that most lawmakers oppose dissolving parliament. Nevertheless, the optics of instability have already unsettled investors.
Analysts at ING noted that while direct contagion across the eurozone appears limited, the risk of indirect contagion — through weakened investor confidence and risk aversion — remains high. This sense of fragility is amplified by broader European headwinds: sluggish growth in Germany, an uncertain fiscal path in Italy, and renewed debates over the EU’s tariff strategy toward steel imports. Together, these factors have weighed on the euro, which has fallen roughly 0.8% over the past week, hitting its lowest level since late August.
The euro’s weakness underscores how political developments can override macroeconomic fundamentals. Even as inflation moderates and the European Central Bank signals caution on further tightening, the market’s focus has shifted toward the region’s political credibility. The perception of an unstable France — a key driver of EU policy — has revived concerns about the eurozone’s cohesion and its ability to coordinate fiscal responses amid global uncertainty.
In essence, the euro’s recent slide is less a reflection of its relative valuation against the dollar and more a barometer of confidence in Europe’s political core. Unless Macron’s administration swiftly restores stability, investors may continue to discount the euro, particularly if risk-off sentiment intensifies in the coming weeks.
Japan’s Leadership Change and Market Recalibration
Across Asia, political developments in Japan are adding another layer of complexity to global currency markets. The victory of Sanae Takaichi in the ruling Liberal Democratic Party’s leadership race has prompted speculation that Tokyo will pivot toward more aggressive fiscal stimulus and maintain an accommodative monetary stance.
Markets had briefly flirted with the notion that the Bank of Japan (BoJ) might accelerate its normalization cycle after delivering the first interest rate hike in 17 years earlier in 2025. However, the combination of fragile domestic growth and a leadership inclined toward looser fiscal policy has tempered those expectations. Analysts at MUFG noted that this “recalibration of market expectations” has applied downward pressure on the yen, dragging it to 152.67 per dollar — near levels last seen in February. The yen’s 3.6% weekly drop reflects renewed capital outflows and investor recalibration around Japan’s policy path.
The Takaichi administration’s potential policy trajectory — centred on higher government spending and sustained BoJ accommodation — may provide short-term support for domestic demand. However, it risks amplifying structural vulnerabilities, including persistent low productivity growth and an overreliance on external demand. Moreover, any sustained yen weakness could strain regional peers, particularly in South Korea and Taiwan, by undermining their export competitiveness.
In broader context, Japan’s situation illustrates how policy divergence among major economies — the U.S., Europe, and Japan — continues to shape global currency flows. As the Fed moves closer to eventual rate cuts while Japan maintains an ultra-loose stance, the yield differential continues to favour the dollar, cementing its relative strength even amid domestic U.S. uncertainties.
U.S. Dollar Steadies Amid Shutdown and Fed Ambiguity
The U.S. dollar index (DXY) was largely unchanged at 98.94, having earlier touched a two-year high. The greenback’s stability came despite a week-long federal government shutdown, which has delayed the release of key economic indicators — including labour and inflation data — critical for shaping the Federal Reserve’s policy trajectory.
Minutes from the September Federal Open Market Committee (FOMC) meeting revealed a divided central bank. Officials remain torn between addressing “sticky” inflation and countering emerging labour market weakness. While most participants favoured further easing this year to bring rates to a more “neutral” setting, several still stressed upside inflation risks. This tug-of-war has left markets uncertain. Futures pricing continues to reflect expectations of a 25-basis-point rate cut at the upcoming Fed meeting, but the pace and scope of subsequent easing remain in question. Analysts at Capital Economics argued that the minutes confirm the Fed’s intention to lower rates modestly, but at a slower pace than markets anticipate — signalling a cautious path toward normalization.
The government shutdown complicates this outlook by depriving policymakers of real-time data. Without updated labour and inflation figures, the Fed risks making decisions based on lagging indicators, raising the potential for misjudging economic momentum. For investors, this data blackout has reinforced a wait-and-see approach, supporting the dollar through a combination of safe-haven demand and reduced visibility into alternative market narratives.
A Balancing Act of Politics and Policy
Taken together, the dollar’s current steadiness masks a volatile undercurrent in global markets. Europe’s political instability threatens to undermine confidence in the eurozone recovery; Japan’s policy uncertainty has reignited downward pressure on the yen; and the U.S. faces a domestic governance impasse that clouds its own policy outlook.
In this environment, the greenback’s resilience is less about strength and more about relative stability. As investors navigate a global landscape defined by political risk, policy divergence, and data opacity, the dollar’s role as a safe haven is once again being tested. The coming weeks — marked by the resolution of the U.S. shutdown, France’s cabinet reshuffle, and Japan’s fiscal direction — will likely determine whether this equilibrium holds or gives way to renewed volatility across currency markets.
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