Key Notes
- The dollar reached a 17-month high against the euro as government-bond selling put Europe’s fiscal risks in focus.
- Higher yields and energy costs are reshaping currency demand while France’s public finances add pressure.
- The September American jobs report is the next immediate test for interest-rate expectations and the dollar.
The dollar reached a 17-month high against the euro on October 1 and held near that level in early Asian trading Friday, as a global government-bond selloff exposed Europe’s fiscal vulnerabilities and renewed concerns about energy-driven inflation.
The euro traded at $1.1237 in Reuters’ early update on October 2, near its weakest level since May 2025. The dollar index stood at 102.08 and was on course for a roughly 1% weekly advance, which would mark its third consecutive week of gains.
The move extends the euro slide covered by MarketSpeaker earlier this week. What has changed is the intensity of the bond-market pressure: investors are demanding higher returns from governments while reassessing which currencies offer protection from the same risks.
Europe’s Fiscal and Energy Risks Weigh on the Euro
In Thursday’s session, the euro fell below $1.123 for the first time since May 2025. It had already lost nearly 2.5% in September, Reuters reported, its largest monthly decline since July 2025.
France has become a focal point. Concerns about its public finances pushed French government-bond yields to a 14-year high, while the euro also weakened against the yen and Swiss franc. That broader decline suggests the pressure was not confined to the dollar pair.
The region’s energy exposure adds another complication. A weaker euro raises the euro cost of an unchanged dollar-denominated import bill, including many energy purchases. Companies can hedge that exposure, but sustained currency weakness can make imported inputs more expensive as contracts renew.
Eurostat’s August figures illustrate the existing strain: euro-area annual inflation was 3.2%, up from 2.9% in July, while energy prices were 14.3% higher than a year earlier. Those are August readings, rather than a new inflation release for October.
The exchange-rate effect is uneven. Exporters receiving dollars can gain when they convert sales into euros, but imported materials and energy may offset part of that benefit. A falling currency therefore does not provide the same relief to every business.
Bond Yields Add Support, but the Signals Are Mixed
The benchmark American 10-year Treasury yield reached 5.344% on Thursday, its highest since 2002, before easing to 5.249% in early Friday trading, according to Reuters. These are intraday observations, rather than closing yields.
The reversal connects with the global bond selloff. Higher yields can attract investors to dollar assets, but the reason yields are rising matters: stronger growth, higher inflation expectations and concern about government finances can produce different currency responses.
ABN AMRO’s October 1 FX research attributed the recent dollar rally chiefly to wider interest-rate differentials. Strategist Georgette Boele said markets were pricing about 90 basis points of additional Federal Reserve increases by the end of 2027, compared with 65 basis points on September 17. Expectations for European Central Bank increases had changed only slightly.
That comparison concerns expected policy paths. It does not mean the Fed has already approved those increases, and a rise in long-term Treasury yields need not reflect a matching change in the next rate decision.
For currency investors, the relative return on American and European assets remains central. A change in that gap can move exchange rates before either central bank acts, especially when investors also want protection from political or fiscal uncertainty.
The Jobs Report Is the Next Immediate Test
The Bureau of Labor Statistics calendar lists the September employment report for October 2 at 8:30 a.m. Eastern time, or 12:30 UTC. The release is still ahead at publication and will provide new figures for employment, unemployment and wages.
Those details can alter assessments of the economy and inflation pressure. The revisions to earlier months will also matter: a strong headline payroll number and a weakening revised trend would send a different signal from broad-based acceleration.
ABN AMRO maintains a year-end EUR/USD forecast of $1.15. Its view assumes scope for aggressive Fed expectations to soften, while high energy prices and European political uncertainty restrict the euro’s recovery. That is a bank forecast, rather than a level implied or guaranteed by the latest market price.
Friday’s employment data will test the American side of that outlook. Europe’s fiscal position and energy costs remain separate sources of pressure, leaving the currency market dependent on more than one policy decision or economic release.
