Dollar Weakens as Oil Prices Drop and Equities Advance

The dollar index (DXY00) slipped 0.32% on Friday. The greenback came under pressure after WTI crude oil prices tumbled more than 2%, easing inflation expectations and weighing on Federal Reserve policy outlook. Gains in equity markets further reduced safe-haven demand for the currency.

However, dollar losses were capped by better-than-expected U.S. economic data, including August capital goods new orders (nondefense, excluding aircraft and parts) and the University of Michigan’s September consumer sentiment index. Hawkish remarks from New York Fed President John Williams, who emphasized the need to return inflation to target, also provided support.

U.S. August capital goods new orders (nondefense, ex-aircraft and parts)—a proxy for business investment—rose 1.6% month-over-month, exceeding the 0.6% forecast. July’s figure was revised upward to 0.6% from previously reported flat growth.

The University of Michigan’s September consumer sentiment index was unexpectedly revised higher by 0.3 points to 48.1, defying expectations of a downward revision to 47.5.

Williams stated the Fed cannot ignore supply shocks if they have persistent effects on prices and must return inflation to its target.

Markets are pricing in a 64% probability of a 25-basis-point Fed rate hike at the next FOMC meeting on October 27-28.

EUR/USD (^EURUSD) advanced 0.16% on Friday. Dollar weakness supported the euro, while the 2% decline in crude oil prices benefits the Eurozone economy given its heavy energy imports. Euro gains were limited after the German October GfK consumer confidence index dropped more than expected to a five-month low.

The German October GfK consumer confidence index fell 3.8 points to -30.6, a five-month low, missing the -27.2 consensus.

Markets are discounting a 42% chance of a 25-basis-point ECB rate hike at the central bank’s next policy meeting on October 29.

USD/JPY (^USDJPY) fell 1.07% on Friday. The yen rallied sharply as short-covering emerged after Japanese Prime Minister Sanae Takaichi reportedly told President Trump that the undervalued yen is problematic. The currency extended gains after Japanese Finance Minister Satsuki Katayama said she would continue coordinating with Treasury Secretary Bessent, signaling potential coordinated intervention to support the yen. The 2% drop in crude prices also benefits Japan, which imports over 90% of its energy. Additionally, the yen found support after the 10-year JGB yield rose to a 30-year high of 3.125%, improving interest rate differentials.

The yen strengthened further after Finance Minister Katayama said President Trump shared concerns over the weak yen and that coordination with Secretary Bessent would continue, reinforcing that both governments are monitoring the currency’s depreciation.

Markets are pricing in a 31% chance of a 25-basis-point BOJ rate hike at the next policy meeting on October 30.

December COMEX gold (GCZ26) closed up $23.20 (+0.54%) on Friday, while December COMEX silver (SIZ26) gained $0.799 (+1.25%).

Precious metals settled higher amid a weaker dollar. Gains accelerated after WTI crude fell more than 2%, easing inflation expectations and potentially prompting central banks to loosen monetary policy—a bullish factor for metals.

Upside was limited by hawkish comments from New York Fed President Williams and reduced safe-haven demand due to equity market strength.

Recent fund flows remain supportive: long holdings in gold ETFs climbed to a 6.5-month high on Thursday, while silver ETF holdings rose to a 5.75-month high on Tuesday.

Strong central bank demand continues to underpin gold prices. China’s PBOC increased its gold reserves by 650,000 ounces to 76.73 million troy ounces in August—the largest increase in three years and the twenty-second consecutive month of purchases.

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