The US dollar has reached a 17-month high as investors flee to safe-haven assets amid the fiscal crisis in France. EUR/USD dropped to its lowest level since May 2025, even as traders dialed back bets on a Fed rate hike this month.
The US dollar climbed to a 17-month high on demand for safe-haven assets as a fiscal crisis escalates in France. Prime Minister Sébastien Lecornu's government has presented a draft budget aiming to cut the deficit from 5.6% to 5% of GDP in 2027 through €54 billion in spending cuts, but markets doubt parliament will approve it. As a result, US and French government bond yields have diverged.
EUR/USD and EUR/CHF slide as capital flees to safety
EUR/USD fell 1% intraday to its lowest level since May 2025, while EUR/CHF dropped 1.7% in under two days, pointing to capital flight into safe-haven assets. The spread between French and German bond yields is approaching 150 basis points, within the peak range seen at the end of 2011 and higher than in the first half of 2012, when the debt crisis was raging across Europe.
Fed pause talk fails to slow the dollar
The dollar is strengthening even as the probability of a Federal Reserve rate increase in October fell to 22%. New York Fed President John Williams has pointed to a pause in the cycle to allow for more data, and Fed Vice Chair Philip Jefferson has echoed that view. September's ISM manufacturing data disappointed, though the figure stays close to its 2022 highs, indicating the US economy's continued strength.
Futures markets are pricing a 39% probability of a 100-basis-point rise in the federal funds rate over the next 12 months. It is unlikely the ECB can match that pace: the eurozone economy is suffering from soaring energy prices and budget problems, compounded by political turmoil in France, Germany and other countries.
Tokyo inflation raises the odds of a BOJ hike
Tokyo's consumer price index, a leading indicator of national inflation, accelerated from 1.8% to 2.7% in September. That has raised the odds of a Bank of Japan rate hike in October and pulled USD/JPY back from its recent highs. The Bank of Japan has raised rates twice this year, in June and September, marking its fastest tightening pace since 1990.
If Japan raises rates again in October while the Fed holds steady, the yen will have an opportunity to strengthen against the dollar.
Source: ActionForex
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