Dollar Heads for Biggest Monthly Gain on Euro in 14 Months

The dollar held close to its highest level of the year against the euro on Wednesday, on track for its biggest monthly advance in 14 months, as robust US growth and rising interest rates contrasted with energy and debt concerns in Europe.

The euro slipped overnight to $1.1312, its weakest since May 2025, and was trading near $1.1339 in Asian hours. It was also testing support around 178 yen. Across September, the dollar has gained nearly 2.5% on the euro, while the Australian dollar fell below 70 US cents for the first time since early August.

Analysts pointed to a combination of factors weighing on the euro. European benchmark gas prices earlier this month spiked to their highest since 2022, and French markets remain under pressure from debt and political gridlock ahead of next year's presidential election. The spread between French and German yields has widened beyond 115 basis points, the widest since 2012. Options pricing has shifted sharply in recent sessions to favour protection against further euro weakness.

The dollar also touched a 16-1/2-month high against the Swiss franc overnight at 0.8358 francs. The franc has been pressured as investors sought low-yielding alternatives to the yen for carry trades. The yen, meanwhile, has lost favour as a short against the dollar after US-Japan yen buying in July and August, followed by warnings against testing their resolve and a faster pace of Japanese rate hikes. The dollar has fallen 1.5% on the yen this month.

Markets are awaiting the Fed's preferred inflation gauge, core PCE, due later on Wednesday, but attention is focused on Friday's US jobs report, which if strong could reinforce expectations of rising US rates. Those expectations were tempered overnight when New York Fed President John Williams said there is "no need for urgency" in raising rates. Two-year Treasury yields fell about 3.5 basis points, and Fed funds futures pricing for a rate hike next month eased to 50% from 71%.

Australian inflation figures due later on Wednesday could support the Aussie, which slipped after Reserve Bank of Australia Governor Michele Bullock said the board discussed holding rates before announcing Tuesday's 25-basis-point hike. The Australian dollar hovered around $0.6986 early in the Asia session, about 20 pips above its overnight low, while the New Zealand dollar, which hit its lowest since last November overnight, was pinned at $0.5638. Sterling touched a three-month trough on Tuesday and last sat nearby at $1.3227. The yuan headed for its seventh straight quarterly gain on the dollar in its final session before China's October 1-7 holidays.