US Dollar Strengthens as Fed Outlook Supports New Yearly Highs

The US Dollar (USD) is maintaining its strength as investors react to French fiscal concerns and shifting expectations around central bank policies. ING’s Chris Turner points out that the US Dollar Index (DXY) is reaching new yearly highs, with 102.85 identified as the next potential upside target. Turner attributes this rise to the sell-off in the euro, which makes up 58% of the DXY basket.

The recent soft September jobs data did not weaken the dollar’s outlook. Instead, markets are pricing in unchanged Federal Reserve policy in late October, followed by a rate hike in December. Key events this week, including today’s ISM services data and the release of the FOMC minutes on Wednesday, are expected to support the dollar further.

The Fed’s monetary policy tightening cycle remains more resilient compared to other central banks, particularly the European Central Bank (ECB). Since late September, the ECB’s expected tightening cycle has been reduced by 30 basis points, while the Fed’s has only seen a 13-basis-point adjustment. This divergence is keeping the euro under pressure.

Independent euro weakness is a major factor in foreign exchange markets, driven by investors adjusting positions in response to French fiscal risks. With the ECB’s tightening cycle more vulnerable to repricing than the Fed’s, the EUR/USD pair is likely to remain under pressure.