Dollar nears 17-month high as Fed hike odds fade and euro weakens

The US dollar began the week on a strong note, nearing a 17-month high as traders reacted to the diminishing likelihood of a Federal Reserve rate hike in October following weaker-than-expected US jobs data. Fiscal concerns in France further weakened the euro, which dropped to $1.1246, its lowest level since May 2025 after four straight weeks of declines.

The euro's decline was driven by France's rising debt levels and political uncertainty ahead of next year's elections. Other currencies also saw fluctuations, with the British pound at $1.3241 and the Japanese yen trading at 157.69 per dollar. The dollar index, measuring the US currency against six major peers, stood at 101.97.

Global markets remain unsettled after last week's bond market sell-off, which pushed borrowing costs to multi-decade highs and impacted French debt. The yield on US 10-year Treasuries fell to 5.262%, down from a 24-year high that had rattled investors. According to Matthew Ryan, head of market strategy at Ebury, the dollar is benefiting from rising Treasury yields and safe-haven flows.

Analysts at OCBC noted that elevated rate volatility could continue to pressure currencies like the euro and cyclical assets, while traditional safe-haven currencies, including the Swiss franc and the US dollar, remain supported. The Swiss franc traded at 0.8286 per dollar and 0.9312 per euro, while the Australian and New Zealand dollars saw modest changes.

While the euro's struggles have contributed to the dollar's strength, recent gains have also been fueled by expectations of Fed rate hikes in the coming months. However, Friday's jobs data suggested a slower labor market, reducing the likelihood of a rate hike in October. Traders now see a 78% chance of the Fed holding rates steady this month, though they still anticipate hikes in December and early 2027.

Some analysts believe market expectations for rate hikes are overly aggressive. Mohit Kumar of Jefferies suggested that the Fed and the European Central Bank may only raise rates once each, citing potential declines in oil prices or slower growth as factors that could alter the central banks' plans.