Dollar Rebounds on Japanese Political Shift, But Faces US Headwinds

Key Takeaways:

*Dollar index rises in early Asian trade on Japanese political shift

*Dovish expectations for Japan weigh on yen and bond yields

*US government shutdown prolongs, threatening long-term dollar outlookan weigh on yen and bond yields

Market Summary:

The US dollar index, which measures the greenback against a basket of six major currencies, rebounded during early Asian trading hours. The move followed rising expectations that Japan may see a shift toward a more dovish prime minister, encouraging investors to rotate part of their portfolios back into the dollar. The prospect of Japan maintaining or even deepening its expansionary monetary stance could widen interest rate differentials, supporting the greenback in the near term.

Previously, market participants were primarily focused on the US Federal Reserve, with consensus building around the likelihood of rate cuts in the coming quarters. However, if other central banks refrain from matching the Fed’s policy trajectory, or even lean toward more accommodative stances, the dollar may retain some short-term resilience. The latest developments in Japan underscore this dynamic, with investors increasingly factoring in regional divergence in monetary policy.

Nonetheless, the broader outlook for the dollar remains clouded. The ongoing US government shutdown has entered a more critical phase, with no progress in negotiations between the White House and congressional Democrats. Senior administration officials have warned that if discussions remain deadlocked, the Trump administration could proceed with mass layoffs of federal employees. Such measures would likely weigh heavily on consumer sentiment, reduce household income, and further constrain economic growth — amplifying downside risks for the US currency.

Beyond fiscal gridlock, political uncertainty is also dampening investor confidence. With rising tensions in Washington and heightened scrutiny on fiscal sustainability, markets are increasingly pricing in the possibility that the dollar’s recent rebound may prove temporary. Coupled with structural headwinds such as a widening fiscal deficit and softening growth momentum, the greenback’s longer-term trajectory appears tilted to the downside.

Technical Analysis

DOLLAR_INDX, H4:

The Dollar Index rebounded sharply from the support level of 97.55, successfully breaking above both moving averages. The index is now testing resistance at 98.15. A decisive breakout above this level could open the door for further gains, with the next resistance at 98.75.

Momentum indicators are supportive: the MACD shows a bullish crossover with rising momentum, while the RSI stands at 62, above the midline, also forming a golden cross. This setup suggests bullish bias in the short term.

However, the longer-term fundamental backdrop for the dollar remains bearish. Should the index fail to break 98.15, a pullback toward 97.55 or even 97.00 is likely.

Resistance Levels: 98.15, 98.75

Support Levels: 97.55, 97.00

GOLD, H4:

Gold prices advanced after a breakout above the record resistance at 3880.00. Momentum indicators confirm the bullish bias: the MACD has formed a golden cross with fading bearish momentum, and the RSI remains strong at 67, above the midline.

If bullish momentum persists, gold could extend gains toward the next resistance at 3965.00, followed by 4000.00. Conversely, a failure to sustain momentum may lead to a retracement back to 3880.00, with further consolidation possible around this support zone.

Resistance Levels: 3965.00, 4000.00

Support Levels: 3880.00, 3790.00