The dollar plays on bets

• The US dollar is losing confidence again.
• The Fed doubts that interest rates will be lowered.
• The Bank of Japan intends to continue the cycle.
• The yen is testing the authorities’ resolve.

The US dollar is in a tug-of-war. On the one hand, the Supreme Court is likely to rule that Donald Trump’s tariffs are illegal. This will further undermine confidence in the greenback, as was the case in the first half of the year due to pressure from the White House on the Fed.

On the other hand, according to New York Fed President John Williams, the Fed’s verdict at the last FOMC meeting in 2025 will be the result of a balance of several forces. Inflation in the US is high and shows no signs of slowing down. However, the economy remains stable.

The futures market interpreted this rhetoric as ‘hawkish’ and lowered the chances of a federal funds rate cut in December to 63% from 95% two weeks earlier. At the same time, there is still significant room for further repricing. The EURUSD will likely fall if interest rates are not cut.

Nevertheless, the loss of confidence in the US dollar and the preservation of the euro’s main trump cards allow the main currency pair to look to the future with optimism. The eurozone economy is improving, and the ECB has likely brought its cycle of policy easing to a close. Divergences in GDP growth and monetary policy suggest that the EURUSD uptrend is sustainable.

Meanwhile, speculators have decided to test the Japanese government’s resolve. Despite several bearish signals for USDJPY, the pair has continued to rise. The minutes of the last BoJ meeting showed its readiness to raise the overnight rate in December. It was noted that the conditions for continuing the normalisation cycle had been met. If there are no shocks to the global economy and financial markets, the rate will be raised. Indeed, inflation and wages continue to show no signs of slowing down, despite the introduction of tariffs.

Hints of an overnight rate hike, coupled with falling US stock indices and a deterioration in global risk appetite, should have helped the yen. However, speculators are pushing USDJPY quotes up in the hope of currency intervention by the official Tokyo authorities. A quick reversal could enable traders to make a substantial amount of money.

The FxPro Analyst Team