Dollar holds firm as French fiscal woes keep euro on back foot

By Ankur Banerjee

SINGAPORE, Oct 5 (Reuters) - The dollar started the week on a firm footing, hovering near a 17-month high on Monday as traders weighed receding odds of a Federal Reserve rate hike this month after soft US jobs data while fiscal worries in France left the euro vulnerable.

The euro was at $1.1246, stuck near its lowest level since May 2025 after clocking four consecutive weekly declines as France's debt levels and concerns about political gridlock ahead of next year's election hit the common currency.

Sterling fetched $1.3241, while the Japanese yen bought 157.69 per US dollar in early Asian hours. That left the dollar index , which measures the US currency against six major units, at 101.97.

Markets are also still reeling from last week's bond rout, which drove global borrowing costs to multi-decade highs and pummelled French debt as investors fretted over inflation risks from soaring oil prices.

The yield on US 10-year Treasury was at 5.262%, below the 24-year high it touched last week that rattled markets.

"The dollar is the main winner in the current environment as not only is the rise in Treasury yields boosting the appeal of US assets, but the broad selloff in debt globally is fuelling safe-haven flows into the greenback," said Matthew Ryan, head of market strategy at Ebury.

OCBC strategists said if rate volatility remains elevated, pressure on carry trades, cyclical currencies and the euro is likely to persist, while traditional havens such as the Swiss franc and the US dollar should remain supported.

Swiss franc changed hands at 0.8286 per dollar. It fetched 0.9312 per euro after rising over 1% last week. The Australian dollar held steady at $0.6956, while the New Zealand dollar eased 0.1% to $0.5610.

FED RATE PATH

Apart from the euro's troubles, much of the dollar strength in recent weeks has come from traders pricing in Fed rate hikes in the coming months but data on Friday dented those expectations after US job growth slowed more than expected in September.

Mansoor Mohi-uddin, chief macro strategist at Bank of Singapore, said the data showed the labour market is not overheating despite inflation staying above the Fed's 2% target since the pandemic, expecting interest rates to be left unchanged this month.

Traders are now pricing in a 78% chance of the US central bank holding rates steady in October, compared to 36% a week earlier, CME FedWatch tool showed. They still expect a hike in December and another two in the first half of 2027.

Analysts though think the market pricing is aggressive and the Fed may not hike as many times.

Jefferies strategist Mohit Kumar said the firm's base case is for one hike each from the Fed and the European Central Bank. "By the time we come to March, either oil prices would be lower or if we are wrong and oil prices are elevated, we are talking slower growth," he said.

"In either scenario, we do not see central banks delivering the rate hikes currently priced in."