September is witnessing a strong resurgence in the U.S. dollar (USD), with much of its strength coming at the expense of the euro. In contrast to the U.S. economy, which continues to show signs of overheating alongside expectations of higher interest rates, Europe is grappling with a series of challenges related to energy, public debt, and political uncertainty.

Below is an overview of the foreign exchange market in recent trading sessions.

A Diverging Picture: U.S. vs. Europe

According to Brent Donnelly, President of FX Trading at Spectra Markets, the widening divergence between the USD and the euro is being driven by three key factors in Europe:

• Energy crisis: European benchmark natural gas prices have surged this month to their highest level since 2022.

• Falling behind in technology: Europe is gradually losing ground in the global artificial intelligence (AI) race.

• Political uncertainty & public debt: French markets are facing significant pressure from political deadlock ahead of next year's presidential election, as well as the country's heavy debt burden. The yield spread between French and German government bonds has widened beyond 115 basis points, the largest gap since 2012.

Major Currencies in Focus

The strength of the greenback has triggered a domino effect across the foreign exchange market:

• Euro (EUR): Throughout September, the USD has gained nearly 2.5% against the euro, marking its largest monthly increase in 14 months. Overnight, the euro fell to $1.1312, its lowest level since May 2025. Options markets are now increasingly tilted toward hedging against further declines in the euro.

• Swiss Franc (CHF): The USD climbed to a 16.5-month high against the Swiss franc at 0.8358. The CHF has come under selling pressure as investors seek alternative low-yield currencies for carry trades outside the Japanese yen.

• Australian Dollar (AUD) & New Zealand Dollar (NZD): The AUD fell below 70 U.S. cents, trading around $0.6986, for the first time since early August. Meanwhile, the NZD also hit its lowest level since November last year at $0.5638.

• British Pound (GBP): The pound fell to a three-month low, trading around $1.3227.

A Few Bright Spots

• Japanese Yen (JPY): The USD has fallen 1.5% against the yen in September. This has been attributed to U.S.-Japan intervention to support the yen in July and August, along with Japan's move toward faster interest-rate hikes.

• Chinese Yuan (CNY): The yuan is heading toward its seventh consecutive quarterly gain against the USD ahead of China's extended national holiday.

What Lies Ahead?

The USD's next leg higher will depend heavily on incoming U.S. macroeconomic data.

Markets are closely watching the Personal Consumption Expenditures (PCE) inflation index, the Federal Reserve's preferred measure of inflation, and particularly Friday's employment report. A stronger-than-expected jobs report could reinforce expectations that U.S. interest rates will remain higher for longer.

However, those expectations have recently weakened after New York Fed President John Williams said there was "no need to rush" on further rate increases. His remarks immediately pushed two-year Treasury yields slightly lower, while market expectations for a rate hike next month fell from 71% to 50%.

Source: Reuters