The US dollar has climbed to an 18-month high this autumn, with growing concerns about Europe encouraging some investors to bet on further gains for the greenback.
Analysts said the dollar continues to benefit from high and potentially rising US interest rates, resilient economic growth and persistent inflation risks. At the same time, mounting concerns over large deficits in France and possible financial pressure spreading to Italy and other parts of Europe are becoming an important factor for the currency.
The dollar has gained about 5% against the euro this year, helping lift the dollar index, which measures the US currency against six major currencies.
“The euro remains under pressure, limiting one of the dollar’s main alternatives,” said Uto Shinohara, senior investment strategist at Mesirow Currency Management.
The gap between French and German 10-year bond yields recorded its biggest weekly increase in decades last week, while the difference between Italian and German yields posted its sharpest rise since the COVID-19 pandemic. The euro was last down 0.67% against the dollar at $1.1183.
Karl Schamotta, chief market strategist at Corpay in Toronto, said investors were increasingly focused on countries where political difficulties were preventing governments from returning to sustainable fiscal paths.
The euro has also received less support from the European Central Bank’s efforts to contain inflation.
The ECB raised interest rates by 25 basis points in September, its second rate increase this year aimed at controlling an energy-driven rise in inflation. However, the euro weakened after the decision as markets became concerned about the economic impact of further rate increases.
Higher European yields have traditionally supported the euro, but its muted response suggests investors are placing greater weight on growth and fiscal risks. Rising energy prices could add to those pressures.
“Structurally, Europe is a major energy importer and more reliant on manufacturing than the US. The impact is clear: high energy prices will hold the region back,” said Benjamin Ford, a researcher at Macro Hive.
Ford expects the euro to fall to $1.10 within the next month, almost 2% below its current level.
“The US appears to have a stronger medium-term thesis whereas Europe is prone to being on the receiving end of shocks,” he said.
Investors are also considering whether the ECB can continue its fight against inflation without putting further pressure on an already weakened economy. Euro zone inflation rose more than expected in September and is expected to increase further in the coming months as energy costs climb, keeping pressure on the central bank to raise rates.
“The asymmetry around where the euro can go is very much skewed to the downside,” said Dan Tobon, head of G10 FX strategy at Citi in New York.
He said one potential source of further weakness could be an ECB policy mistake if the central bank tightens monetary policy too aggressively against an economy that can no longer withstand it.
Options markets are also reflecting growing pessimism toward the euro. One-month euro risk reversals were on Friday at their most bearish since March, while the three-month measure reached its lowest level since June 2024.
Meanwhile, Federal Reserve policymakers have indicated that inflation risks remain elevated, helping keep US Treasury yields at multiyear highs.
“Yields continue to climb, with US rates at an absolute spread advantage to most developed markets,” Shinohara said.
Fed funds futures showed an 84% chance of at least one additional 25-basis-point rate increase by December.
Although few strategists expect a dramatic dollar surge from current levels, they said resilient US growth, elevated yields and Europe-specific risks continue to favour the US currency.
“As of right now, this skew is very much looking ugly for Europe,” Tobon said.
Ojo Triumph
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