Monthly Foreign Exchange Review
In October, the U.S. dollar strengthened as tariffs took effect and Fed rate cut expectations fell. The government shutdown limited economic data, but private reports showed rising inflation, slowing growth, and steady housing activity. Overall, reduced rate-cut odds and tariff impacts boosted the USD.
October currency markets saw the USD begin to gain strength against other currencies in response to the ongoing bite of tariffs and falling rate cut expectations for the December 10 meeting. In theory, US tariffs should cause increasing USD strength as foreign countries try to weaken their currencies to offset the costs of tariffs for their companies. After a delay, economic reality is setting in, and tariffs are providing the expected bid to the USD. Still, Tariffs have settled at a much lower rate than initial announcements, and many tariffs have been kicked down the road in a series of extensions. As a result, the impact of the tariffs has been much lower than expected for both trade volumes and exchange rates. Despite these lower tariff levels, any tariffs slow international business, and tariffs do have a well-established currency rate impact.
Rate cut expectations for December fell from 85%+ to below 70%, and Chairman Powell has expressed reluctance to cut rates in December. This change in expectations is bullish for the USD. These lower expectations plus tariffs finally beginning to bite will tend to give the USD vs. other currencies, and that is exactly what we began to see late in October.
US economic data has been suspended with the government shutdown, so the gold standard US government data has not been available. Crucially, the US is missing growth, unemployment and inflation data—and this data drives the “dual mandates” the fed is responsible for managing by setting rates. Chairman Powell compared this to “driving in the fog,” and the lack of data will force the fed to move cautiously.
There is still some private data available, and there is anecdotal evidence of higher inflation and a slowdown in economic activity. Housing prices are continuing to fall across Texas, Florida, the Southeast, and California. Existing home sales came in higher at 1.5% and have held up in 2025 near the 4m annual range where it has been since mid-2022. Note: the 4m annual range is quite low, just above GFC levels. Still, housing prices are not decreasing, and this is a good sign that housing price reductions are helping to keep housing volumes from stalling completely. Philly Fed manufacturing index showed a shocking -12.8 print vs. +10 expected on October 16. Still, without US federal government data, we have much less visibility into what is happening in the US economy.
The euro broke lower out of a 3-month trading range late in October against the USD to 1.1493. The EURUSD had established a trading range between 1.1550 and 1.1919 from August through mid-October, but new tariff threats and lower odds of a rate cut gave the USD room to move outside of this range.
EU inflation fell to 2.1% from 2.2%, and the ECB held rates steady in October at 2%. ECB chair Lagarde has been cautious about cutting rates, but if inflation continues to fall, expect to see cuts in 2026 or late 25. Analysts polled by Bloomberg predict a median of 1.1900 for the EURUSD rate for Q1 2026, which has fallen from 1.20 last month. Defense spending in 2026 may provide a boost to the EU economy.
The Canadian dollar continued to trade weaker during most of October but attempted a recovery in late October, trading to 1.3986. Tariffs are impacting Canada probably more than any other country in the world. PM Carney met successfully with Trump in early October, which is helping to smooth possible tariff reductions in the future. Employment increased by 60k jobs in September but no change in the unemployment rate. Inflation rose to 2.5% due to higher grocery costs. Oil price declines weighed on the CAD, and the October drop to $56 pushed the USDCAD to 1.4080. Analysts polled by Bloomberg predict a median of 1.3700 for the USDCAD rate for Q1 2026.
The British pound fell to lowest levels since April of this year to finish at 1.3152 in October. UK economic data came in slightly stronger than expected, with business conditions improving and retail sales rising 0.5% over expectations for a decline. Business leader confidence remains near record lows despite improving slightly. The UK central bank kept rates steady at 4% in October again. Analysts polled by Bloomberg predict a median of 1.3600 for the GBPUSD rate in Q1 2026.
The Japanese yen weakened to above 154 in October after several months of a very tight trading range of 145.50 and 148.94. The election of a new prime minister took the yen out of this trading range and now expectations are for the yen to continue to weaken. The fiscal outlook for Japan has shifted even more negatively with increased spending on defense and industry expected for 2026. The bank of Japan shocked the markets with a much less hawkish stance against inflation than expected. Hedge funds are betting that the Yen weakens to 160 by EoY 2025 which would be near multi-decade lows for the JPY. The BoJ is holding rates steady at 0.5% which is stimulative given the inflation rate of 2.8%. Bloomberg Analysts expect a yen rate of 145 in Q2 2026.
The Mexican peso weakened against the USD trading back to 18.55 from 18.2867 in September. The Mexican economy surprised everyone by growing 1.8% in the first half of the year, but the forecast is for much weaker growth in the second half. Late in October, the US and Mexico agreed to another 90-day extension. Inflation bumped up to 3.76%, while core inflation remained steady at 4.28%. Central bank held rates at 7.5%. Analysts polled by Bloomberg predict a median of 18.8000 for the USDMXN rate by Q2 2026.
The Chinese yuan remained near its strongest levels of the last 12 months at 7.1125. Trump met with President Xi late in October, and the tariffs were trimmed in response for a new focus on fentanyl in China. Full Tariffs have been pushed a full year until Nov. 10, 2026. China delayed its rare earths export ban and its ban on chip exports until then. China is pushing for a trilateral trade agreement with China, Japan and Korea all cooperating. Chinese manufacturing activity contracted again in October. Recent demographic news show that China’s birth rate in major cities is 0.5% per woman which points to a major population bust. Analysts polled by Bloomberg predict a median of 7.0800 for the USDCNY rate by Q2 2026.
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