Dollar Climbs as Fed Hike Expectations Persist French Fiscal Worries Weigh on Euro

The US dollar strengthened against most major currencies, supported by firm expectations of further Federal Reserve rate hikes. While Friday’s weak jobs report lowered the odds of an October rate increase to around 22%, markets still anticipate a quarter-point hike in December. The ISM Services Prices Index accelerated to its highest level since July 2022, reinforcing the outlook for tighter monetary policy. Investors will watch closely for remarks from Fed Governor Michelle Bowman and Dallas Fed President Lorie Logan for additional clues on future rate moves.

The euro extended its decline amid growing concerns over French fiscal policy. Prime Minister Sébastien Lecornu’s budget proposal, which includes 43 billion euros in savings, faces significant opposition, raising doubts about its passage. French government bond yields surged, with the spread over German bonds hitting its widest level since 2012. This fiscal uncertainty has prompted investors to price in a potential contagion effect across the Eurozone, complicating the European Central Bank’s (ECB) inflation-fighting strategy.

Wall Street’s major indices closed higher on Monday, led by a 1% gain in the Nasdaq as investors continued to bet on artificial intelligence-driven growth. The rally occurred alongside a rise in Treasury yields, which remained above 5.30%, a level that could eventually impact corporate financing costs. Meanwhile, gold prices stayed within a narrow range, trading between $4,115 and $4,200, with the potential for further declines if yields and the dollar strengthen.