Dollar at 17-month high as bond rout, French fiscal worries weigh on euro

By Ankur Banerjee

SINGAPORE, Oct 2 (Reuters) - The US dollar headed for its third straight week of gains on Friday, as a bond market rout in the face of inflationary fears over higher oil prices and concerns over French fiscal health kept the euro rooted near its lowest in 17 months.

Investors were reeling from a steep global bond selloff on Thursday that sent yields on benchmark US 10-year Treasuries to 5.344%, their highest since 2002, before bargain hunters stepped in to help stabilise the market.

The 10-year yield was last at 5.247% on Friday while the rest of the bond market also steadied as traders braced for US jobs data that could influence the near-term policy outlook after a soft inflation report dented October rate hike bets.

The euro was at $1.1237, hugging its lowest level since May 2025. The yen firmed a bit to 157.84 per US dollar after data showed annual core inflation in Tokyo accelerated in September at the fastest pace in 10 months.

The dollar index , which measures the US currency against six rivals, was at 101.93, set for a 1% gain this week, its third consecutive weekly rise, a run it last had in May 2025.

Moh Siong Sim, currency strategist at OCBC in Singapore, said the initial move higher in yields was because of rising energy prices, but that was overshadowed by European fiscal risk concerns.

"The underperformance of French and Italian government bonds relative to US Treasuries and German Bunds points to a flight into the most liquid and defensive sovereign markets," he said.

"The dollar strength is mostly skewed towards European currencies with the exception of the Swiss franc, which has seen a bit of revival in its safe haven status."

The Swiss franc was 0.17% firmer at 0.8293 per US dollar. It was last at 0.9333 per euro after rising more than 1% in the previous session.

The dollar strength pushed sterling and the Australian dollar to their respective three-month lows before steadying a bit. The New Zealand dollar was 0.14% firmer at $0.5614 after hitting its lowest level since November 2025.

Prashant Newnaha, senior rates strategist at TD Securities, said the dollar strength was a "flight-to-safety move" spurred on by developments in Europe. "In this scenario expect the dollar index and the yen to strengthen at the same time," he said.

ATTENTION SWITCHES TO US PAYROLLS

Investor focus will be on the US payroll report due later in the day, with data expected to show that job growth slowed in September. The unemployment rate is forecast to have been 4.1% for a third straight month.

The report comes after data on Wednesday showed US consumer prices rose less than expected in August, along with downward revisions to July's figure, leading traders to rein in wagers of a rate hike from the Federal Reserve later this month.

Two of the Fed’s top policymakers this week staked out an unusually clear case for taking in more data before deciding about another hike.

Traders are pricing in a 72% chance of the Fed standing pat in October compared to 36% a week earlier, the CME FedWatch tool showed. They still expect a rate hike by the end of the year.

Charu Chanana, chief investment strategist at Saxo, said investors are confronting the uncomfortable mix of sticky inflation, heavy government borrowing and large bond supply.

"The fact that long-end yields are pushing higher even as expectations for an immediate Fed hike have eased suggests this is increasingly about the term premium and fiscal risk, not just the next Fed decision," she said.

Brent crude futures were back above $100 per barrel as traders kept an eye on the stalled talks between the US and Iran to end the seven-month-long war in the Middle East. O/R