Dollar holds firm as French fiscal woes keep euro on back foot

The United States dollar maintained its strength this week, nearing a 17-month high on Monday, as traders considered the diminishing probability of a Federal Reserve rate hike this month following weak US jobs data. Meanwhile, fiscal concerns in France weakened the euro, which was trading at US$1.1246 and had not recovered since May 2025 after four consecutive weekly declines.

The dollar index, which measures the US currency against six major currencies, stood at 101.97. Sterling reached US$1.3241, and the Japanese yen was valued at 157.69 per US dollar. However, the dollar's gains were tempered by the market's lingering impact from last week's bond rout, which pushed global borrowing costs to multi-decade highs and severely impacted French debt amid worries about inflation due to soaring oil prices.

Matthew Ryan, head of market strategy at Ebury, noted that the dollar is currently benefiting from both higher US Treasury yields and the global sell-off in debt, which has attracted safe-haven flows into the greenback. OCBC strategists suggested that if rate volatility persists, this pressure on carry trades, cyclical currencies, and the euro is expected to continue, while traditional safe havens like the Swiss franc and the US dollar should remain supported.

Other currencies performed as follows: the Swiss franc traded at 0.8286 per dollar, the euro at 0.9312 per dollar (up over 1% last week), the Australian dollar remained at US$0.6956, and the New Zealand dollar slipped 0.1% to US$0.5610. The Federal Reserve's potential rate hike schedule was also under scrutiny, with traders now giving a 78% chance of an unchanged rate in October, down from 36% a week prior, according to the CME FedWatch tool.

Nonetheless, the expectation remains for a hike in December and two more throughout the first half of 2027. Nonetheless, analysts believe the current market pricing may be overly optimistic, and the Federal Reserve might not hike as often as anticipated.