Dollar at 17-month high as global bond rout hits euro

The US dollar reached a 17-month high on Friday, soaring to near its highest level since May 2025. This surge occurred as global bond markets experienced a rout, pushing borrowing costs to multi-decade peaks amid inflation concerns over higher oil prices. Investors faced a steep sell-off in bonds on Thursday, with the yield on 10-year US Treasuries hitting 5.344%, the highest since 2002.

The bond rout was primarily driven by worries about France's fiscal health, which dragged the euro to its lowest level since May 2025. The yen remained steady at 158 per US dollar, while the dollar index increased by 1%, marking its third consecutive weekly gain. Charu Chanana, chief investment strategist at Saxo, noted that investors are grappling with high inflation, heavy government borrowing, and a substantial bond supply.

The steep rise in long-end yields, even as expectations for an immediate Federal Reserve hike have eased, suggests that the term premium and fiscal risk are now the primary concerns, rather than the next Fed decision. Data showed that US consumer prices rose less than expected in August, leading traders to lower their expectations for a rate hike from the Fed.

With the Fed now focusing on inflation and price pressures, a weak labor market report could significantly impact the US dollar, Treasuries, and the broader financial market. Sterling and the Australian dollar were also significantly weakened, hovering around their three-month lows.