The US dollar index has climbed back near 101.0, retesting its summer highs after a two-week rally. Rising Treasury yields and Brent crude are driving the move, while the euro and yen each face their own vulnerabilities.
Dollar gaps up on stop-loss triggers
The dollar opened the week with a gap up following a two-week rally, likely driven by stop-loss orders triggered in Asian trading. European markets pared back some of those gains, but the bullish picture held. The dollar index has returned to the region of its summer highs near 101.0.
This retest is unfolding against an ongoing reassessment of the Federal Reserve's policy outlook, driven by persistent geopolitical tension in the Middle East and Warsh's determination to tackle inflation. The US has rejected Iran's proposal for a short-term reopening of the Strait of Hormuz, while Tehran remains unwilling to soften its demands. Brent crude has resumed its rise, pulling the dollar higher at the expense of risk assets.
Treasury yields and Europe's vulnerabilities
Bolstered by Treasury bond yields, the dollar sees no obstacle to continuing its rally, especially as its rivals carry their own weaknesses. The yield spread between French and German bonds continues to widen, signaling political risk in Europe.
France is being dubbed the "second Greece," recalling the 2012 European debt crisis, though the situation looks even more alarming here. The country's public debt is approaching 120% of GDP, a level that also blunts the economy's response to stimulus. Its tax burden, at 43% of GDP, is the highest in the G7 — compared with 27% in the US and 38% in Germany — and the second highest worldwide after Denmark's 45%, even though Denmark's public debt sits at just 27% of GDP.
Yen slips despite talks, euro leans on inflation
USDJPY has resumed its rise despite Scott Bessent's statements that he discussed the need to strengthen the yen with Satsuki Katayama. Investors argue that reviewing the rate every three months, rather than every six, no longer reflects the reality, given the Fed is expected to deliver four hikes over the next 12 months, including one at the end of October following a September tightening. In Japan, by contrast, the likelihood of consecutive rate rises is considered low.
Investors are also watching for US employment data for September, since a strong labor market would let the Fed raise the federal funds rate in October with a clear conscience. CME rate futures put the probability of that outcome above 70%.
The euro, meanwhile, is counting on inflation for support. Bloomberg analysts forecast eurozone consumer prices will rise from 3.2% to 3.7% in September, the highest reading in three years. Investors will watch whether high energy prices feed through to core inflation, which would raise the odds of an ECB rate rise in October from the 39% currently implied.
Source: ActionForex
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