The euro slid to a fresh trough, touching $1.1312 after dropping up to 0.5% on Tuesday. That put it on course for its worst month since July 2025, with a 2.6% decline against the dollar so far in September.
Investors are leaning toward more Federal Reserve tightening to cool inflation, a backdrop that has supported the greenback. By contrast, while the European Central Bank is also seen raising rates, many market participants think the US economy can better absorb additional hikes than the eurozone. The upshot: the Bloomberg Dollar Spot Index has gained around 2% so far this month, while the US 30 year Treasury yield rose to its highest level since 2002. Nearly every Group of 10 currency weakened against the dollar in Tuesday's trading.
Win Thin, the Bank of Nassau 1982 chief economist, said, "This is broad-based dollar strength on rising yields." On Monday, ECB President Christine Lagarde said higher bond yields will weigh on growth and restrain how much elevated energy costs feed into inflation. Francesco Pesole, a currency strategist at ING Groep NV, labeled it a "surprise dovish tilt," and added, "if one central bank hikes in October, it will be the Fed, and not the ECB."
Options markets lean toward additional euro weakness, with longer term positioning last week the most bearish since March 2025. Morgan Stanley recently changed its stance, projecting a 3% drop in the common currency versus the dollar by mid 2027. Macro Hive strategist Ben Ford sees the pair heading to $1.12, saying "we expect the market to continue to add to dollar long positions, with the Fed unlikely to unwind hawkishness before the ECB."
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Some traders say the dollar's surge may be overextended. The euro dollar pair's relative strength index fell below 30 last week, a classic oversold signal. "We expect month-end rebalancing flow to be bearish for the dollar," said Howard Du, a strategist at TD Securities in New York. "Our expectation is for the euro to consolidate higher toward $1.14 in the coming week."
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