Key facts
- The dollar index rose 0.64% to 102.49 on Wednesday.
- The euro fell 0.83% to $1.1166, nearing 17-month lows.
- The yen weakened 0.09% to 158.265 per dollar.
- Investors await Federal Reserve meeting minutes for interest rate signals.
- French bonds are under pressure due to fiscal concerns.
- Markets price in a 68.6% chance of a Fed hike in December.
The dollar strengthened against major currencies on Wednesday, driven by rising oil prices and anticipation of the Federal Reserve's September policy meeting minutes. Investors are closely watching the minutes for any indications of future interest rate hikes.
The euro fell 0.83% to $1.1166, approaching 17-month lows, as French bonds faced renewed pressure due to fiscal concerns. The yen also weakened by 0.09% to 158.265 per dollar, despite a dovish Bank of Japan board member expressing support for interest rate increases.
Adarsh Sinha, head of global G10 FX strategy at BofA Global, noted that for the euro to fall below $1.10, the market would need to price in more Fed rate hikes than currently expected. The US central bank is set to release minutes from its September meeting, where it raised rates to combat inflation.
The dollar index, a measure of the dollar against a basket of currencies, climbed 0.64% to 102.49. This recovery followed a 0.27% slide on Tuesday, with the dollar benefiting from safe-haven demand as Middle East supply concerns pushed Brent crude futures above $100 a barrel.
Dominic Bunning, head of G10 FX strategy at Nomura, observed that while the dollar has seen a sustained upward trend, momentum may be slowing. He added that higher oil prices are providing short-term support, but any signs of de-escalation in the Middle East or softening US data could weigh on elevated rate expectations for the coming year.
Recent comments from Fed policymakers have been less hawkish, following lower-than-expected personal consumption expenditure and jobs data. According to CME FedWatch, the probability of a 25 basis point rate hike in October has decreased to 21.6% from 51% a week ago, though markets are pricing in a 68.6% chance of a hike in December. Fed officials Christopher Waller, Neel Kashkari, and Alberto Musalem are scheduled to speak later on Wednesday. The Fed is also expected to release consumer credit data for August, which may show a decrease.
Bond yields globally have risen due to expectations of central bank rate hikes and concerns about government finances. French debt is particularly under pressure as politicians grapple with the budget deficit ahead of the 2027 election. A snap election in Spain has also added to pressure on the euro. However, the euro saw a sharp rally on Tuesday after French presidential candidate Marine Le Pen increased her proposed spending cuts target. Matthew Ryan, head of market strategy at Ebury, suggested these cuts could ease fiscal concerns but viewed the rally as a technical rebound. He anticipates the French political risk premium to remain elevated, potentially capping any euro relief rally.
Bank of France head Emmanuel Moulin stated that France's economic situation is serious due to rising borrowing costs, but the country does not currently require assistance from the European Central Bank. Sterling lost 0.62% to $1.3195, and the euro fell 0.21% to 84.63 pence, its lowest level since June 2025.
In Japan, Bank of Japan policymaker Ayano Sato indicated support for phased interest rate increases, and the BOJ may signal this month that underlying inflation is rising.