US Dollar Strengthens as French Fiscal Stress and Fed Hike Hopes Persist

The US dollar is entering October near its 2026 high, supported by strong inflation signals in the US and growing fiscal stress in France. Despite softer-than-expected payrolls, which slowed the dollar’s rally, expectations for a December Federal Reserve hike remain a key driver. French budget concerns have pushed sovereign spreads wider and weakened the euro, adding another layer of support for the dollar.

The euro dropped 1% against the dollar after France’s fiscal watchdog questioned the government’s deficit plan, widening the OAT-Bund spread to 154 basis points. While the US payroll report showed just 29,000 jobs added in September, wage growth slowing, and unemployment rising to 4.2%, the probability of an October Fed hike dropped from 48% to 18%. However, the likelihood of a December hike remains at 85%, with long-term yields still supporting the dollar.

The Canadian dollar has fallen for a fifth consecutive week, with USD/CAD trading above 1.425. Wide yield differentials and trade uncertainty continue to outweigh support from higher oil prices. The peso erased its 2026 gains in September as dollar strength and higher volatility triggered a carry unwind, with strong exports providing only limited support.

This week, the US services ISM report and the FOMC minutes will guide the broader dollar move, while Canadian employment, Mexican inflation, and central bank minutes will shape near-term hedging levels in USD/CAD and USD/MXN.