US Dollar Strengthens on Fed Rate Hike Expectations and Euro Weakness

The US Dollar (USD) is maintaining its strength as investors adjust to French fiscal risks and reassess the tightening paths of the Federal Reserve and the European Central Bank (ECB). ING’s Chris Turner notes that the US Dollar Index (DXY) is reaching new yearly highs, with the next target at 102.85. This upward momentum is largely driven by the euro's decline, which makes up 58% of the DXY basket.

Despite softer-than-expected September jobs data, market expectations for the Fed remain unchanged. Investors are pricing in no policy change in October but anticipate a rate hike in December. Key data releases this week, including today's ISM services report and the FOMC minutes on Wednesday, could further support the dollar.

The Fed’s monetary policy tightening cycle appears more resilient than that of the ECB. Since late September, expectations for the ECB's tightening have been reduced by 30 basis points, compared to just 13 basis points for the Fed. This divergence is keeping pressure on EUR/USD as investors reassess risks, particularly around French fiscal policies.

Overall, the euro's independent weakness remains the dominant theme in forex markets. As the ECB's tightening cycle is more vulnerable to repricing than the Fed's, the euro is likely to stay under pressure.