Dollar Continues Advance

MACRO FRAME

US activity remains resilient enough to prevent a disinflationary narrative, while fiscal stress has become increasingly evident in euro-area dynamics.

STOCK INDEX FUTURES

Equity index futures opened modestly lower as investors took profits in technology after record highs and reassessed the implications of still-elevated Treasury yields and oil prices near $100 per barrel. The immediate policy signal is more favorable at the front end as markets now see an 80% probability of an October Fed hold following September’s jobs report on Friday. However, the combination of a 5.28% 10-year yield, large Treasury supply, fiscal concerns, and energy-driven inflation leaves the broader risk backdrop fragile. For the Fed, September’s report was a bit of a mixed bag: weak hiring, downward revisions, yet stable unemployment, labor utilization, and participation argue against interpreting the data as evidence of a sharp deterioration in labor demand. The report should support policy patience and a somewhat easier front-end rates bias, while we ultimately expect the Fed to continue to raise rates again in December.

Watch point: Despite tech volatility, the earnings backdrop suggests bullishness, despite the advent of a new hiking cycle.

CURRENCIES

US DOLLAR: The USD index rose 0.35% to 101.80. Despite yesterday’s softer-than-expected inflation data and reduction in near-term tightening odds, the dollar moved higher into today’s session. While dollar strength can be attributed to strong US growth indications, higher Treasury yields, and a hawkish Fed, strength is also coming from a weaker euro. Today’s main events for the dollar are several Fed speakers and ISM’s manufacturing PMI survey. Hawkish comments and a strong reading are likely to add to near-term tightening odds, though would likely require very strong readings to recover the same pricing odds the market held before today’s release. That leaves September’s PCE reading next month as the next big inflation release for the Fed, which gives markets and Fed members plenty of time to digest ongoing geopolitical dynamics and assess other economic data.

Watch point: A reduction in tightening expectations for the Fed will act as the greatest risk to the dollar maintain its move above the 100 level.

US DOLLAR: The USD index rose 0.25% to 102.20, after touching 102.53, its strongest level since April 10, 2025. The dollar’s resilience suggests that FX markets remain focused less on a softer jobs report and more on the broader policy and rates environment. A still-restrictive Fed, higher Treasury yields, and global fiscal stress maintain the dollar’s carry advantage and reinforce its role as a defensive currency. The dollar is also benefiting from the absence of an attractive large-currency alternative. The euro, the traditional primary counterpart to the greenback, is weakened by France’s fiscal and political risks; the yen faces its own debt-sustainability concerns despite official support; and sterling remains constrained by UK fiscal uncertainty.

Watch point: A reduction in tightening expectations for the Fed will act as the greatest risk to the dollar maintain its move above the 100 level.

EURO: The euro fell 0.45% to $1.1204, its lowest level since May, 2025. Concerns over France’s fiscal position have driven French–German 10-year spreads to widen roughly 145 bps, briefly exceeding 158 bps on Friday to mark its widest level since late 2011. French fiscal risk now presents itself as a key downside risk to the euro ahead of the 2027 French presidential election. France’s risk premium is occurring alongside a weaker German political backdrop, elevated energy costs, low regional gas storage, and persistent competitive pressure from China. These developments leave the euro more exposed to rising oil prices and global duration stress than other major currencies. Money markets have continued to reduce expectations of an October hike, now priced at just 20%, in-line with Fed pricing. However, markets are no longer fully priced for a rate hike before year-end.

Watch point: Broader price direction will be subject to Fed-ECB policy expectations, which has been favorable to the dollar in advent of a hawkish repricing in Fed policy expectations the near-term.

BRITISH POUND: Sterling slipped 0.20% to $1.3217. It will be a quiet week of data in the UK, leaving Fed minutes and geopolitical news to be a dominant driver in price direction. The latest French episode favors sterling largely through relative euro weakness, not through a distinctly improved UK fundamental backdrop. The UK’s discussion of pension reform and closer EU ties offers some modest support at the margin, but GBP’s broader direction will continue to depend on gilt-market stability, the Bank of England’s expected policy path, and the extent to which the dollar remains supported by elevated Treasury yields. Money markets have increased expectations of tightening over the next 12 months from 84 bps to 95 bps priced in this morning; markets see a 95% chance of a hike at the November meeting.

Watch point: We expect macro factors to pressure the pound with fundamentals favoring a stronger dollar. We look for GBP/USD to weaken in Q4 2026.

JAPANESE YEN: The yen slipped 0.24% to 158.21 yen per dollar. The 30-year JGB yield rose to a record 4.235% amid concern over greater debt issuance, inflation pressure associated with the Middle East conflict, and the cost of funding the government’s spending plans. Prime Minister Takaichi pledged to control government-bond issuance and respond swiftly to market turbulence in a speech earlier this morning. Markets remain largely unconvinced of policy action from the BOJ after the bank’s most recent summary of opinions provided little clarity on the timing of a potential rate hike ahead of policy meetings in October and December. However, the minutes did point to a board more favorable to raising rates once more. The greatest near-term upside risk for the currency remains market intervention. Markets are pricing roughly a 16% chance of a hike in October and see 19 bps of tightening by year-end.

Watch point: While markets are underwhelmed at the BOJ, a path for additional rate hikes looks to be the primary scenario.

AUSTRALIAN DOLLAR: The Aussie is little changed at $0.6959. It’s a quiet week of data for Australia, which will give markets more time to asses the rate outlook for the Reserve Bank of Australia and give geopolitical developments more room to determine price direction. Monthly inflation data came in just under forecasts and led markets to further reduce odds of a near-term rate hike. CPI rose 0.4% m/m in August, under forecasts got 0.5%. The trimmed mean measure of core inflation rose 0.2% in August, under forecasts of 0.3%, though the annual pace held at 3.6% for a third straight month. This follows the RBA’s decision to raise rates by 25 bps to 4.60% last week. RBA Governor Bullock said the board believed financial conditions were now tight but were unsure if that would be enough to bring inflation down. She also noted policy worked with a lag and the board wanted to see how the hikes already delivered would impact the economy, a signal markets took as a potential end to further tightening. Bullock referenced that inflation data will play the greatest role in determining where policy lands in the future.

Watch point: August’s hiring figures argue for a higher-for-longer stance, leading the focus to Q3’s inflation data.

TREASURY FUTURES

Yields are little changed across the curve, though selling picked up in the morning ahead of ISM’s September PMI data for the services sector. Signals on how strong private sector activity is will play a dominant role in price direction today and could lead markets to shore up bets on a rate hike this year. However, with recent Fed speak and September’s jobs report, the Fed appears poised to hold rates steady in October and assess incoming data. While September’s jobs report was dovish through the weaker hiring momentum, its stable household-survey and wage details limit the case for an aggressive repricing in policy. Payrolls have historically underperformed when the Labor Day holiday falls late in the month, as was the case this year. Other labor data have shown no signs of a broad increase in layoffs. Applications for unemployment benefits have been hovering at 57-year lows amid robust corporate profit growth and resilient domestic demand. Meanwhile, the GDP revisions from last week further strengthen the case for tighter policy in the coming months: real final sales to private domestic purchasers were revised to a robust 4.6%. The latter measure, capturing consumer spending and private fixed investment, suggests underlying domestic demand was considerably stronger than the headline GDP figure alone implies. For the Fed, growth indicators remain robust, favoring their hawkish stance, though it is likely that policymakers will want to see how inflation trends play out making a rate hike more favorable in December/January.

Watch point: Inflation risk, fiscal and corporate supply, capital competition and term premium will be key factors in determining whether the yield curve maintains its recent flattening or falls into a bear steeping move.

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