The USD appreciated on Monday, driven by political shifts in Japan and France. Japan’s Liberal Democratic Party (LDP) elected Sanae Takaichi as its new leader, which will likely confirm her as the country’s first female prime minister next week. Markets interpreted her victory as signalling a return to Abenomics-style fiscal expansion and a slower pace of policy normalization. USD/JPY rose by 2% to 150.35, its highest level since July 31. The 10-year JGB yield increased by 3 bps to 1.692%, its highest level since mid-2008. The Nikkei 225 was higher by 4.8% to a fresh lifetime high of 47,945.
The sudden resignation of French Prime Minister Sebastien Lecornu, just hours after announcing a new cabinet lineup, sent EUR/USD to a low of 1.1650 during the European session. With his fifth government collapsing in two years, President Emmanuel Macron is facing pressure from the opposition far-right National Rally (RN) and the far-left New Popular Front (NFP) to either resign or hold new snap elections. However, Macron has been clear about serving until the end of his term in 2027. Doubts remain that new elections would resolve the systemic political instability, i.e., a hung parliament and a polarized electorate, resulting in coalition governments with short life spans and limited mandates. France's 2026 budget is set to miss today's official deadline and the extended October 15 cutoff, drawing the keen scrutiny of rating agencies. While this keeps the euro sensitive to widening OAT-Bund spreads, EUR/USD ended the overnight session above 1.17 on weaker USD sentiment, driven by another political drama – the US government shutdown.
Following its rise to 98.5 on political developments in Japan and France, the DXY Index declined to 98.1, near the day’s opening level. The Democrats’ proposal to fund the US government and end the shutdown failed by a 45-55 vote, while the Republican bill failed by a 52-42 vote, short of the 60 votes needed in the Senate to pass. This shutdown is proving more difficult to resolve than past ones due to extreme partisan division over healthcare, amplified by US President Donald Trump’s threat of mass layoffs, and the White House disproportionately cutting or freezing federal funding for projects in Democratic-led states. Concerns about the macroeconomy will start as the shutdown extends beyond two weeks, with recession worries and credit rating risks surfacing beyond four weeks.
Markets will likely need to juggle between the JPY, EUR, and USD because of key events converging in mid-October. They include Japan’s Diet vote to formalize her appointment as prime minister and possibly her cabinet lineup announcement, the extended deadline for France’s 2026 budget, and the deadline to pay the US military.
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“Coming together is a beginning, staying together is progress, and working together is success.”
Henry Ford
October 7 in history
The Ford Motor Company introduced the first moving vehicle assembly line in 1913.
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