US dollar at 17-month high as global bond rout hits euro

The US dollar reached a 17-month high on October 2 as a global bond sell-off drove borrowing costs to multi-decade peaks due to inflationary concerns and rising oil prices. Investors panicked after a significant sell-off in global bonds on October 1, with yields on the benchmark US 10-year Treasuries hitting 5.344%, the highest since 2002, before a US jobs report that could impact short-term policy decisions.

The 10-year yield was at 5.249% in early trading on October 2, while the rest of the bond market stabilized. The euro slipped to US$1.1237, its lowest level since May 2025, amid worries about France's fiscal health. The yen remained steady at 158 per US dollar after Tokyo's annual core inflation rose in September at its fastest pace in 10 months.

The dollar index, tracking the US currency against six peers, rose to 102.08, marking a 1% gain this week and its third consecutive weekly increase, the last such run occurring in May 2025. Saxo's chief investment strategist, Charu Chanana, noted that investors are grappling with high inflation, heavy government borrowing, and a large bond supply.

The fact that long-end yields are increasing despite the easing expectations for an immediate Federal Reserve rate hike suggests that the term premium and fiscal risk are driving this trend, not just the upcoming Fed decision. September's US consumer prices data showed a lower-than-expected rise, and revisions to July's figure further prompted traders to reduce bets on a Federal Reserve rate hike later in October.

Fed officials have signaled a need for more data before deciding on further rate hikes, intensifying the emphasis on the upcoming US payroll report expected on October 2. The report may reveal a slowdown in job growth and a persistent unemployment rate at 4.1% for the third consecutive month. Fed officials are closely watching the data to determine the appropriate monetary policy stance.

The strength of the dollar has been largely driven by a flight to safety, spurred by economic developments in Europe. Sterling and the Australian dollar both hit three-month lows at US$1.3187 and US$0.6918, respectively, hovering near their lowest points in the past year. Both currencies are facing pressure due to their close ties with the euro.

The New Zealand dollar also weakened by 0.22%, reaching its lowest level since November 2025. The dollar's recent gains have come at the expense of the euro as political risks in Europe and the energy crisis stemming from the Middle East conflict have dampened sentiment for the single currency. The euro has also struggled against the yen and the Swiss franc, while French debt yields surged to a 14-year high due to concerns about France's precarious financial situation.

Analysts at Pepperstone believe the nature of the dollar's rise is changing, shifting away from US exceptionalism towards broader issues, particularly in Europe.