Softening Rate-Cut Bets Push Dollar Value Higher Amid Trade Improvement

The dollar staged a notable rally on Wednesday, with the dollar index climbing 0.65% to post a 2-week high—a move triggered by shifting market expectations around Federal Reserve monetary policy. The catalysts were twofold: the BLS unexpectedly canceled publication of the October employment report, removing crucial labor data ahead of December’s FOMC meeting, and hawkish commentary from the October 28-29 Fed minutes signaled that “many” officials would prefer to keep rates steady through the end of 2025. These developments dramatically shifted the odds on a December rate cut, collapsing from a 70% probability the previous week to just 28% as the market repriced its expectations.

Beyond Fed policy signals, trade flows proved supportive for the dollar’s value proposition. The August trade deficit narrowed significantly to -$59.6 billion from July’s -$78.2 billion, beating economist forecasts of -$60.4 billion. This improvement in the trade deficit underscored stronger US competitiveness and provided fundamental support to the currency as investors reassessed dollar attractiveness on a real economic basis.

The weakness in competing currencies amplified the dollar’s gains. The yen tumbled to a 10-month low against the greenback after Goushi Kataoka, advising Japanese Prime Minister Takaichi, suggested the BOJ would likely hold rates through March 2025. More significantly, Kataoka disclosed that Japan plans a supplementary budget of roughly 20 trillion yen ($129 billion)—substantially larger than last year’s 13.9 trillion yen stimulus—raising concerns about Japan’s debt sustainability. These dovish signals and fiscal expansion concerns weighed on the yen, with USD/JPY climbing 0.95% on the session.

EUR/USD declined 0.46% to a 1.5-week low, pressured by the stronger dollar but anchored by diverging central bank outlooks. Markets now assign just a 4% probability to an ECB rate cut at December’s meeting, with the European central bank largely concluded its easing cycle while the Fed retains multiple expected cuts through end-2026. This divergence provided some modest support to the euro and limited downside.

Precious metals showed mixed action as conflicting forces jousted over prices. December gold futures rose 0.40% and December silver climbed 0.66%, partially recovering from the week’s sharp selloff. Dovish BOJ commentary initially buoyed safe-haven demand, yet the metals ultimately surrendered gains as the dollar rallied and Fed rate-cut probabilities contracted. Central bank buying remained a supporting factor, with China’s PBOC reserves reaching 74.09 million troy ounces in October—marking twelve consecutive months of accumulation—while global central banks purchased 220 million tons in Q3, a 28% increase from Q2.

Supporting data came from Japan’s September core machine orders, which surged 4.2% month-over-month, the largest jump in six months and topping the 2.0% forecast. Meanwhile, US mortgage indicators softened: MBA applications fell 5.2% for the week ending November 14, with the purchase index down 2.3% and refinance index declining 7.3%. The 30-year fixed rate mortgage rose 3 basis points to 6.37%, reflecting the shift away from rate-cut pricing. With trade dynamics improving and monetary policy expectations turning hawkish, the dollar’s near-term trajectory appears supported, though geopolitical uncertainty and central bank intervention continue to create underlying volatility in currency and commodity markets.