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

The dollar began the week on a strong note, hovering close to a 17-month high on Monday as traders weighed the diminishing chances of a Federal Reserve rate hike this month following US jobs data that came in softer than anticipated. The euro found itself vulnerable due to France's fiscal issues, with its value stuck near its lowest level since May 2025, after recording four consecutive weekly declines.

France's high debt levels and political instability ahead of the upcoming election cast a shadow over the common currency. Meanwhile, the British pound traded at US$1.3241, and the Japanese yen was valued at 157.69 per US dollar in early Asian hours, bringing the dollar index to 101.97.

Markets have also been grappling with the aftermath of last week's bond rout, which pushed global borrowing costs to multi-decade highs and inflicted significant damage on French debt due to concerns over inflation risks stemming from soaring oil prices. The yield on US 10-year Treasury notes stood at 5.262%, lower than the 24-year high it reached last week that unsettled markets.

Matthew Ryan, head of market strategy at Ebury, explained that the dollar is the primary beneficiary in the current scenario. Not only are rising Treasury yields enhancing the attractiveness of US assets, but the worldwide selloff of debt is also driving safe-haven flows into the greenback. Matthew Ryan added that if rate volatility continues, pressure on carry trades, cyclical currencies, and the euro is expected to persist, while traditional safe havens like the Swiss franc and the US dollar should remain supported.

The Swiss franc exchanged at 0.8286 per dollar, and the Euro appreciated to 0.9312 per dollar after surging over 1% last week. The Australian dollar held steady at US$0.6956, while the New Zealand dollar slipped 0.1% to US$0.5610.

Apart from the euro's struggles, much of the dollar's strength over recent weeks has been attributed to traders' pricing in Fed rate hikes in the coming months. However, data released on Friday has challenged those expectations, as US job growth slowed more than anticipated in September. Mansoor Mohi-uddin, chief macro strategist at Bank of Singapore, stated that the labor market is not overheating despite inflation remaining above the Fed's 2% target since the pandemic, suggesting that interest rates will likely remain unchanged this month.

Traders are now betting on a 78% chance of the US central bank keeping rates steady in October, up from 36% a week earlier, according to the CME FedWatch tool. While they still anticipate a hike in December and two more in the first half of 2027, analysts believe the market pricing is overly optimistic and the Fed may not hike as frequently as expected.