US Dollar Strengthens on Fed Resilience and Euro Weakness

The US Dollar (USD) is maintaining its strength as investors react to French fiscal risks and adjust expectations for European Central Bank (ECB) tightening compared to the Federal Reserve's more resilient stance. ING’s Chris Turner notes that the US Dollar Index (DXY) has reached new yearly highs, with the next upside target at 102.85.

The soft September jobs data did little to weaken the dollar's prospects. Markets now expect the Fed to keep policy unchanged in October but hike rates in December. This week, attention will be on the ISM services data and the release of the FOMC minutes, both of which could further support the dollar.

Turner highlights that the dollar's resilience stems from the Fed's stronger tightening cycle expectations compared to overseas central banks, particularly the ECB. Since late September, the ECB's expected tightening has been reduced by 30 basis points, while the Fed's has only seen a 13 basis point adjustment.

The euro's weakness is a key factor in the dollar's strength, driven by investor concerns over 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.