US FX WRAP: Dollar gains in safe-haven trade

USD was largerly fimer against peers in what was a haven trade across FX and fixed. The key FX beneficiaries were the USD and CHF, whilst the JPY lagged amid a weaker-than-expected Tankan survey, and a less hawkish-than-expected BoJ SOO. The sharp reversal in yields post-hot ISM was largely ignored in the FX space, as yields gave back notable gains seen in Q3 to start Q4. The ISM headline missed; however, the closely watched Prices component jumped to 77.9 from 71.1, albeit still shy of the 84.6 seen in April, in which WTI was stuck around the USD 100/bbl level.

Multiple Fed speakers were on the calendar. The market reacted towards Fed's Jefferson (voter) echoing Vice Chair Williams remarks on Tuesday. Jefferson said they may take more time to decide the next rate move, giving more time to weigh data that will allow the Fed to make a better call on rates. The pullback in US 2yr yields and Jefferson remarks have seen odds of a Fed October rate hike diminish further, now priced at 24% (prev. 70% last week).

On the labour market, initial claims were little changed W/W, while Challenger layoffs eased slightly in September, as Tech led job cuts with AI remaining the common citation. DXY made new YTD highs of 102.207

EUR saw notable underperformance, a large part due to the CHF strength. Fundamental drivers may have been the floated diesel export ban from the US on France and Germany if they do not release strategic reserves. On Friday, the EU Energy Union taskforce is reportedly meeting on Friday to discuss a potential diesel stock release.

In France, PM Lecornu reportedly aims for EUR 43bln in new savings in the budget. The deficit is seen falling to 5% of GDP by 2027, well above the EU’s deficit-to-GDP ceiling of 3%. This raises three key concerns: a) Will the EU impose fines/sanctions, b) potential use of Article 49.3 – raising political uncertainty, c) French sovereign debt credit rating downgrades. EUR/USD is back to May 2025 levels of 1.1241