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US Dollar Surges but Faces Challenges Amid Inflation Worries
Confirmed
In Short: The move targets longer-dated debt, where yields had surged to levels unseen in nearly two decades amid heavy issuance, geopolitical tensions tied to the Iran conflict, and deteriorating fiscal concerns.
The US Dollar's (USD) rally continued for the third consecutive week, reaching levels last seen in April 2025, as inflation remains persistently high and broadening across sectors.
Against this backdrop, the US Dollar Index (DXY) surpassed the 102.00 barrier, hitting new 17-month peaks and gaining more than 3% in September.
However, the strong upside impulse in the USD appeared dented by the latest Nonfarm Payrolls report, which showed the economy added only 29K jobs last month, a significant drop from the previous estimate of 162K.
Analysts at TD Securities noted that dollar risks remain skewed to the downside heading into remarks by Warsh, with any failure to clarify the Fed’s inflation credibility likely to weigh more materially on the currency.
The move targets longer-dated debt, where yields had surged to levels unseen in nearly two decades amid heavy issuance, geopolitical tensions tied to the Iran conflict, and deteriorating fiscal concerns.
The dollar’s weakness reflects broader market anxieties about U.S. economic stability, with the euro benefiting from the dollar’s decline, rising to $1.1711 on August 21, its highest level since May 14.
Sterling also reached $1.3675, its strongest level since February 11, as the UK's inflation rate accelerated to 3.1% from 2.9%, driven by rising petrol and diesel prices.
The Bank of England has held interest rates but warned that they may rise if high energy prices continue, with Governor Andrew Bailey stating that the longer the volatility persists, the bigger the impact on inflation.
Gold is widely seen as a hedge against inflation and depreciating currencies, with its inverse correlation to the US Dollar and US Treasuries further underscoring its role as a store of value.
Marc Chandler, chief market strategist at Bannockburn Global Forex, captured the market’s skepticism in a Reuters interview: “Bessent’s efforts to suppress U.S. yields haven’t done much for U.S. yields, but it’s undermined the dollar.”
What this adds
The inverse correlation between gold and the US Dollar and US Treasuries further underscores gold's role as a store of value.
The Eurozone's annual inflation rate surged to 3.8% in September, marking its highest level since 2023 and exceeding expectations.
Background
The move targets longer-dated debt, where yields had surged to levels unseen in nearly two decades amid heavy issuance, geopolitical tensions tied to the Iran conflict, and deteriorating fiscal concerns.
The Eurozone's annual inflation rate surged to 3.8% in September, marking its highest level since 2023 and exceeding expectations. This increase was primarily driven by energy costs, which have risen significantly due to the ongoing Middle East conflict.
What's confirmed
- Inflation remains too high and is showing signs of broadening, while energy prices, Middle East tensions, tariffs and AI-related demand continue to create upside risks.
- The US Dollar’s (USD) rally remained everything but abated, climbing for the third consecutive week and reaching levels last seen in April 2025.
- Against this backdrop, the US Dollar Index (DXY) has managed to surpass the 102.00 barrier to hit new 17-month peaks, gaining more than 3% in September.
- The strong upside impulse in the US Dollar appears to have been dented by disheartening prints from the latest Nonfarm Payrolls, showing that the economy added a meagre 29K jobs last month, while the previous print was revised down to 133K (from 162K).
What's still developing
- The US dollar held near three-month lows on August 25 as concerns persisted that the Treasury Department’s expanded bond buyback program could further weaken the currency even as it attempts to stabilize the bond market.
- The dollar index edged up to 99.0 on Monday but remained near its August 21 low, when it fell to a three-month low against the euro on mounting worries about the buyback plan.
- The UK's inflation rate has been pushed up by the Iran war and disruption to global supplies, including liquefied natural gas.
- Meanwhile, there was no change in the bias from Federal Reserve (Fed) officials, as almost all of them advocated for a tighter monetary policy stance, in contrast to the “patience” favoured by New York Fed’s John Williams.