Dollar strength persists amid bond sell-off, euro under pressure

The U.S. dollar strengthened further today as a broad bond market sell-off and rising risk-free rates sustained a risk-off environment, despite sterling’s modest gains. The GBP/USD pair rose 0.09% to 1.3233, while the euro remained under pressure, with EUR/USD climbing 0.12% to 1.1392 but facing downside risks near key support levels of 1.1320–1.1330, according to FX strategist Francesco Pesole at ING. The dollar’s advance was driven by elevated back-end yields and lingering concerns over global risk appetite, despite stretched short-term valuations. Sterling’s modest advance was not underpinned by UK-specific factors, with no material domestic catalysts influencing its performance. Instead, energy market dynamics—including elevated oil prices and geopolitical tensions—played a supporting role, though a brief market correction over U.S.–Iran Strait of Hormuz talks was swiftly reversed due to skepticism over de-escalation prospects. Oil prices remained elevated, with Brent crude trading near $110 per barrel as of mid-month, according to Pesole, who noted the dollar’s support from energy market developments. Meanwhile, the euro faced additional pressures from widening French 10-year yield spreads over German bunds, standing at 110 basis points, and ongoing political uncertainty surrounding France’s budget proposals, despite reports that Marine Le Pen may support the measure. Economic resilience, as evidenced by strong Ifo index readings and PMIs, was only partially offset by broader eurozone yield spreads, reinforcing a narrative that has not helped the currency in the current environment. Pesole cautioned that while new lows in EUR/USD are not expected, downside risks persist, and the dollar’s rally remains underpinned by rising U.S. Treasury yields, with pricing for an October rate hike at 18 basis points. Longer-term projections indicate two full hikes by January 2025 and nearly four by July 2027, reflecting persistent hawkish expectations from the Federal Reserve. The sell-off in global bonds further reinforced the dollar’s strength, as investors sought safer assets amid elevated risk-free rates and geopolitical tensions, including the unresolved situation at the UN General Assembly, which failed to deliver optimism on Gulf region stability.