The US dollar remained close to its strongest level of the year against the euro on Wednesday. It is also heading for its biggest monthly gain against the single currency in 14 months.
Strong US economic growth and higher interest rates continue to support the dollar. Meanwhile, Europe is dealing with renewed concerns over energy prices, government debt and political uncertainty.
Euro Falls to Lowest Level Since May 2025
The euro dropped to $1.1312 on Tuesday, its weakest level since May 2025. It remained under pressure during Wednesday’s Asian session, trading near $1.1337.
The euro is also testing an important support area around 178 yen.
So far in September, the dollar has gained almost 2.5% against the euro. It is also on track to record a third consecutive quarterly advance.
Strong Dollar Weighs on Australian Dollar
Dollar strength has affected several other major currencies.
The Australian dollar fell below $0.70 for the first time since early August. It reached a nine-week low of $0.6959 after Australian inflation figures came in slightly below market expectations.
Brent Donnelly, president of foreign exchange trading at Spectra Markets, pointed to the contrast between the US and European economic outlooks.
He highlighted strong US economic activity alongside concerns over Europe’s position in the global artificial intelligence race, energy security and political developments in France.
European Energy and French Debt Concerns Grow
European energy prices have returned to investors’ attention. Earlier in September, benchmark European gas prices climbed to their highest levels since 2022.
France is also facing growing pressure in financial markets.
High government debt and continued political gridlock ahead of next year’s presidential election have increased investor concerns. The gap between French and German government bond yields has widened beyond 115 basis points, reaching its highest level since 2012.
Currency options markets also indicate that traders have become increasingly cautious about further euro weakness.
However, additional dollar gains may depend on upcoming US economic data.
Dollar Reaches 17-Month High Against Swiss Franc
The dollar also climbed to its highest level against the Swiss franc in almost 17 months on Tuesday, reaching 0.8358 francs.
The Swiss currency has weakened partly because investors have searched for other low-yielding currencies to use in carry trades.
Previously, the Japanese yen was often used for this purpose. However, recent developments have made investors more cautious about betting against it.
Japanese Yen Strengthens Against the Dollar
The yen has become less attractive as a short position following US-Japan intervention to support the currency in July.
Officials have also warned markets against challenging their willingness to intervene again. At the same time, the Bank of Japan has increased the pace of interest rate hikes.
As a result, the dollar has fallen around 2% against the yen during September and almost 3.8% during the third quarter.
USD/JPY touched a nearly two-week low of 156.38 during Asian trading.
US Inflation and Jobs Data Take Center Stage
Investors are now watching key US economic releases for clues about the Federal Reserve’s next move.
The Fed’s preferred inflation measure, the core Personal Consumption Expenditures Price Index, is due later on Wednesday.
However, markets are paying even closer attention to Friday’s US employment report. Strong jobs data could strengthen expectations that US interest rates will continue to rise.
Those expectations weakened slightly after New York Federal Reserve President John Williams suggested that policymakers do not need to rush into additional rate increases.
Following his comments, two-year US Treasury yields fell by around 3.5 basis points.
Market pricing for a Federal Reserve rate hike next month also dropped sharply, falling to around 50% from 71%.
Sterling and New Zealand Dollar Remain Under Pressure
The New Zealand dollar remained close to its weakest level since November after falling sharply on Tuesday. It traded near $0.5646.
The British pound also remained under pressure after reaching a three-month low on Tuesday. Sterling was trading around $1.3237 during Wednesday’s session.
Meanwhile, China’s yuan was heading for its seventh consecutive quarterly gain against the US dollar.
Wednesday marks the final trading session before China’s October 1-7 holiday period.
Overall, the US dollar continues to benefit from stronger economic momentum and higher interest-rate expectations. However, upcoming inflation and employment data could determine whether the latest dollar rally has enough strength to continue.
