U.S. Dollar Declines Against Euro and Yen Amid Trade Tensions

By Chibuike Oguh

NEW YORK (Reuters) -The U.S. dollar fell against the euro and yen on Wednesday with market sentiment weakened by the continuing trade tensions between the U.S. and China.

Traders analyzed comments from Federal Reserve Chair Jerome Powell for cues on upcoming rate cuts amid a U.S. government shutdown, which has hampered the timely release of key data.

The dollar weakened 0.39% to 151.24 against the Japanese yen and was down 0.49% to 0.797 against the Swiss franc, on track for the second straight session of losses against both safe-haven currencies. 

Top U.S. officials, including Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer, blasted China's major expansion of rare earths export controls as a threat to global supply chains.

Greer described China's export controls as a complete repudiation of U.S.-Chinese trade agreements over the past six months although he and Bessent stressed that Washington did not want to escalate the conflict. President Donald Trump had threatened to impose tariffs on China last week in retaliation.

The Chinese commerce ministry defended the rare-earths controls, pointing to a series of U.S. measures on Chinese goods and companies and calling it hypocritical.

"The market is showing an impressive ability to shrug off trade-related headlines and there's a firm belief that the U.S. and China will find a way to move forward and will make an agreement," said Adam Button, chief currency analyst at ForexLive. "The headlines continued to be inflammatory, including today from Bessent and Greer. But the market saw how Trump quickly de-escalated over the weekend and doesn't yet believe he wants a real fight."

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.32% to 98.72, on track for the second consecutive session of losses.

The Fed's Beige Book showed that U.S. economic activity was little changed and employment was largely stable in recent weeks, although there were emerging signs of weakness including more layoffs and middle- and lower-income  households pulling back on spending. 

Powell, in a speech on Tuesday, left the door open to rate cuts by saying the U.S. labor market remained mired in low-hiring, low-firing doldrums. He said the absence of official economic data due to the government shutdown has not prevented policymakers from being able to assess the economic outlook, at least for now.

Markets are currently priced for a quarter-point cut at the October 28-29 Fed gathering and another at the following meeting in December, followed by three more cuts next year, according to LSEG data.

The yield on benchmark U.S. 10-year notes fell 1.6 basis points to 4.038%. Wall Street stocks finished mostly higher as companies continued to report strong results as the quarterly earnings season kicked off.

The Dow Jones Industrial Average fell 0.04%, the S&P 500 rose 0.40% and the Nasdaq Composite rose 0.66%. 

 The euro rose 0.35% to $1.1646 after gaining 0.3% in the previous session, supported by the French government's proposal to suspend landmark pension reforms.

"Even if the French political upheaval has started to moderate, outright bullish catalysts are lacking for the euro at this stage," TS Lombard analysts led by Daniel von Ahlen wrote in an investor note. "Meanwhile, the recent performance of the EUR/USD is now on par with the past rallies following maor policy announcements in the euro area, which adds to our tactical caution on the common currency."

The New Zealand dollar edged up only 0.1% to $0.5721, after dipping to a six-month low of $0.56839 on Tuesday.  The Aussie climbed 0.39% to $0.651, after falling 0.5% a day earlier, when it touched the lowest since August 22 at $0.64405.    

(Reporting by Chibuike Oguh in New York; Additional reporting by Chuck Mikolajczak in New York, Kevin Buckland in Tokyo and Lucy Raitano in London; Editing by Aurora Ellis and Cynthia Osterman)