A stronger dollar to start October

The end of Q3 and the beginning of Q4 have seen a notable dollar strengthening, with the DXY index trading close to 102 as of writing late on Friday, levels last seen on a sustained basis in early 2025. And yet, perhaps surprisingly, near-term policy rate expectations have leaned in the opposite direction. The past week has seen plenty of pushback from Fed officials, while US jobs data landed soft. Combined, this saw October rate hike odds sink from 70% to just 20%. Rather, broad bond market volatility, prompted by growing fiscal concerns, seems to be a primary culprit, triggering an unwind of carry trades and a flight to quality. In that environment, the dollar stands out, while the yen and the Swiss franc have also emerged as notable beneficiaries.

This theme is likely to remain in focus over the week ahead, with concerning levels of government spending in the US, eurozone, Japan and the UK hardly odds-on to be trimmed before Monday morning. Granted, a presidential election in Brazil over the weekend could see hopes of fiscal consolidation building there, though with a run-off all but certain, FX impacts are likely to remain muted in the short term. Elsewhere, inflation readings in Europe dominate the calendar, with Canadian jobs data also due. For the dollar, facing a lighter docket of events, debt concerns and Middle East risks are likely to remain top of mind, favouring the buck holding onto recent gains.

You can read the Week Ahead in full here:

Authors:

Nick Rees, Head of Macro Research

Barry van der Laan, Senior FX Market Strategist

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