Dollar set for September rise, mainly at euro's expense

The US dollar reached near its highest level against the euro throughout the year, setting the stage for the greatest monthly increase in 14 months, according to market analysts. This surge in the dollar is primarily driven by stronger US growth and rising interest rates, contrasting with the energy and debt-related concerns that have been present in Europe.

The euro experienced a low point of the year, trading at $1.1312 overnight and hovering around $1.1339 in Asian markets. Throughout September, the dollar has risen nearly 2.5% against the euro. The escalating greenback also compelled the Australian dollar to dip below 70 cents for the first time since early August. Brent Donnelly, president of foreign exchange trading at Spectra Markets, explained that the robust US economy, Europe's lagging global AI race, and ongoing energy supply and political challenges in France contribute to the euro's decline.

European gas prices hit their highest level since 2022, while French markets suffer from debt and political instability heading into the upcoming presidential election. The divergence in options prices has shifted significantly, favoring hedging against further euro losses. The dollar also touched a 16-1/2-month peak against the Swiss franc, with the franc facing pressure due to investors seeking low-yielding alternatives like the yen to generate carry trades.

In September, the dollar slid 1.5% against the yen. The Federal Reserve's primary inflation indicator, US core PCE, is expected later in the day on Wednesday, although analysts are closely watching Friday's US jobs report. If the jobs report is strong, it could bolster the case for further US interest rate hikes. Meanwhile, two-year Treasury yields experienced a slight decrease, and Fed funds futures pricing for a rate hike next month has declined to 50% from 71%.

Later on Wednesday, Australian inflation figures will be released, which may provide additional support for the Aussie dollar, which has been declining after the Reserve Bank of Australia governor indicated a potential rate hike. The Australian dollar is currently trading around $0.6986, a 20-pip increase from its overnight low, while the New Zealand dollar has hit its lowest level since November last year.

The British pound reached a three-month low, trading close to $1.3227. The Chinese yuan is on track for its seventh consecutive quarterly growth against the dollar before the Chinese national holiday on October 1-7.