USD: Dual momentum drives the dollar higher

The US dollar’s rally continues to gain traction, supported by both overseas weakness and changing expectations at home. Political instability in France and renewed dovishness in Japan have weighed heavily on the euro and yen, which together make up nearly half of the dollar index. This combination has given the greenback a noticeable lift.

In the United States, sentiment has turned more hawkish after the latest Federal Reserve minutes highlighted persistent inflation risks. Traders have reduced their expectations for rate cuts, leading to a rise in short-term yields and a flatter curve.

However, the dollar’s advance is driven more by weakness elsewhere than by optimism about US fundamentals. Japan’s loose fiscal and monetary stance continues to undermine the yen. The New Zealand dollar has softened following the RBNZ’s unexpected 50-basis-point rate cut, while political uncertainty in France has kept the euro under pressure. Even sterling and the Swiss franc are struggling, the pound affected by gilt market volatility and the franc constrained by uninspiring fundamentals.

With limited alternatives, investors are favouring the dollar as a defensive play. Volatility indicators confirm this: USD/JPY one-month risk reversals are close to parity for the first time in three years, and bearish sentiment towards the euro has reached a three-month peak. The pattern across major currency pairs reflects a broader theme. The dollar is being chosen not for its own strength but for the comparative weakness of others.

The greenback has also remained firm despite ongoing concerns about a potential US government shutdown. Any progress in political negotiations might offer brief support, but for now the dominant story remains global rather than domestic.

EUR: Political unease and weak data weigh on the euro

The euro continues to struggle, with EUR/USD extending losses after falling below 1.1650 and heading towards 1.1600, its lowest level in a month. The move gathered pace after disappointing German industrial production data showed a decline of 3.9 per cent year on year and 4.3 per cent month on month. The figures have reignited concerns that Europe’s largest economy is losing momentum, leaving the euro down roughly 1 per cent against the dollar for the week so far.

Remarks from ECB policymaker Muller, who said that inflation is near target and growth remains steady, failed to improve sentiment. This suggests that the decline has been driven more by market psychology than by fundamental factors. Additional pressure came from reports of tension in EU–US trade relations, with Washington seeking new concessions that could weaken the recently agreed 15 per cent tariff ceiling. Because the deal is not yet legally binding, investors believe the United States still has room to press for further changes, which has added to the euro’s vulnerability.

The release of the Federal Reserve minutes provided some short-term relief, as their cautious tone implied that further US rate cuts remain possible later in the year. This encouraged some buyers to defend the 1.1600 level. Sentiment may stabilise in the coming days, supported by expectations that President Macron will name a new prime minister within 48 hours, helping to ease political tensions in France.

GBP: Bank of England policy key to sterling’s direction

Sterling’s earlier recovery against the euro has begun to fade as signs of political progress in France reduce risk aversion. The euro has regained ground, pushing GBP/EUR back towards €1.15 after the pair briefly reached a three-week high.

Against the dollar, the pound has fallen for three consecutive sessions and is moving closer to its 200-day exponential moving average near $1.33. The focus now turns to the Bank of England. Chief Economist Huw Pill’s recent comments emphasised the importance of maintaining price stability, suggesting that he may resist supporting a rate cut in November while inflation remains close to 4 per cent.

If the Bank leaves interest rates unchanged, the UK’s relatively high yield environment could help sterling find renewed support. However, a shift towards monetary easing would likely trigger renewed weakness, potentially driving the pound back towards $1.30 and reversing recent gains against the euro.

Attention is also turning towards the 26 November Budget. While markets have already priced in a moderate fiscal premium, any signal of higher borrowing or slower growth could put additional pressure on the pound. Huw Pill’s influence on the Monetary Policy Committee will be important, especially if his stance affects how Governor Bailey decides to vote.

Looking ahead: Dollar dominance by default

Currency markets remain influenced more by relative weakness than by clear strength. The dollar continues to attract demand due to uncertainty abroad, the euro is weighed down by political and trade risks, and sterling’s outlook depends heavily on the Bank of England’s stance. Until there is a clear shift in global growth or inflation dynamics, investors are likely to maintain a defensive bias, favouring the dollar by necessity rather than conviction.