Dollar Extends Strength Near 18-Month Highs Amid Elevated Yields
The US dollar continues to hold near 18-month highs, supported by higher Treasury yields and persistent inflation risks. The DXY index remains above its recent range as investors focus on resilient growth and potential further Federal Reserve tightening. Ten- and 30-year Treasury yields have climbed to around 5.3% and 5.6%, respectively, levels not seen since 2002.
The main driver behind the dollar's strength is the elevated interest rates in the US compared to other major economies. Despite softer August PCE data, markets have pared back expectations for an October rate hike. However, strong recent activity data and a resilient labour market leave tightening risks firmly alive.
Oil prices remain a key factor, with Brent currently trading around $97/bbl. Energy costs continue to sustain inflation concerns and limit the scope for a significant dovish repricing of the Fed. Attention now turns to jobless claims and Friday's payrolls report, which will likely influence market expectations further.
The euro has struggled to respond to otherwise supportive economic data, due in part to rising political uncertainty across the euro area. The French-German yield spread has widened to its highest level since 2012, reflecting growing concern over France's fiscal outlook and broader political uncertainty. This has led to a bearish sentiment towards the single currency.
The pound enters Q4 at an important crossroads, with sterling making moves against the euro. Despite mixed UK economic data, GBP/USD has proven relatively resilient compared to EUR/USD. However, near-term risks remain skewed to the downside, particularly with the upcoming 28 October Autumn Budget intensifying scrutiny of the government's fiscal plans.