During early Asian trading on Friday (September 25), the euro edged lower against the dollar, hovering near 1.1370 and sitting in its weakest zone since July 29. The dollar strengthened on the back of hawkish remarks from Federal Reserve officials and a lack of progress in U.S.-Iran talks, weighing on the euro. The U.S. 30-year Treasury yield touched 5.501%, its highest since June 2004, while the 10-year yield climbed to 5.223%, its highest since June 2007. Market pricing for a Fed rate hike in October has risen to about 67.5%, up sharply from 55.4% a week ago and 11% a month ago. In the Middle East, U.S.-Iran negotiations have still not produced substantive progress, and Iran's president said the United States "must choose" whether to end the conflict, with geopolitical uncertainty continuing to provide safe-haven bids for the dollar. Traders are now focused on Fed officials' remarks later on Friday for further policy clues.
Rising Fed Rate Hike Expectations Emerge as the Core Driver of Euro Weakness
The euro edged lower against the dollar on Friday, with the main pressure coming from dollar strength, and the core logic behind that dollar strength is the continued rise in Fed rate hike expectations. Philadelphia Fed President Paulson said on Thursday that policy may need to be tightened further if the economy continues to evolve as expected, noting that inflation remains well above the Fed's 2% target. That comment echoed recent hawkish signals from other Fed officials. According to the CME FedWatch Tool, the market currently prices the probability of a benchmark rate increase in October at nearly 67.5%, up sharply from 55.4% a week earlier and 11% a month earlier. Three factors underpin rate hike expectations:持续 rising oil prices, the resilience of the U.S. economy, and continued hawkish comments from Fed policymakers. The U.S. 30-year Treasury yield touched 5.501%, its highest since June 2004, while the 10-year yield climbed to 5.223%, its highest since June 2007. The sustained rise in yields reflects market pricing for the Fed to keep restrictive policy in place for longer.
Hawkish Fed Remarks Reinforce Tightening Expectations
Fed official Hammack's latest remarks delivered a firm hawkish signal. She stressed that "price stability is the central bank's responsibility," while warning that inflation remains elevated against a backdrop of solid demand and that risks are tilted to the upside, underscoring her firm commitment to restrictive policy. She also warned that the longer inflation stays high, the harder it becomes to tame, further reinforcing market expectations that the Fed will resist premature easing.
Middle East Situation: Stalled Talks Keep Safe-Haven Flows Into the Dollar
In the Middle East, U.S.-Iran negotiations have still shown no substantive progress. Iranian President Pezeshkian said whether to end the conflict with Iran should be decided by the United States, and that Tehran does not want to continue fighting. However, according to two Iranian sources, negotiations are stalling because neither side is willing to give up its leverage. Uncertainty over U.S.-Iran talks and the ongoing Middle East conflict may continue to drive safe-haven flows into the dollar, adding further pressure on the euro against the dollar. In the current environment, the persistence of a geopolitical risk premium reinforces the dollar's status as the world's primary safe-haven currency.
The Euro Itself: A Tug-of-War Between Wider Rate Differentials and Improving German Data
From the euro's own perspective, its movement remains pulled by multiple factors. Strategists at the well-known institution Scotia Bank noted that the euro "remains mildly tone" and that price action continues to reflect "the ongoing widening of front-end rate differentials" as well as "continued EU concerns over the impact of a potential U.S. diesel export ban," although the United States denied yesterday that a 90-day ban would be imposed. On the data front, Germany's IFO survey improved slightly more than expected in September, with the business climate index rising to 89.9 and the expectations index rising to 90.4. Scotia Bank noted that IFO sentiment data have shown an "unusual divergence" from German GDP since 2024, but the lag remains evident, and the improvement in sentiment is somewhat more consistent with a stabilization of growth trends in the broader economy. However, that improvement is not yet enough to reverse the euro's current weak setup, with wider rate differentials and external uncertainty still the dominant factors.
Summary
The euro edged lower against the dollar on Friday, with the core pressure coming from the continued rise in Fed rate hike expectations. U.S. long-term Treasury yields rose to their highest levels since 2004 and 2007, and market pricing for an October rate hike has climbed to about 67.5%. Hawkish remarks from Fed official Hammack further reinforced tightening expectations. At the same time, U.S.-Iran talks remain stalled, and Middle East geopolitical uncertainty continues to provide safe-haven bids for the dollar. Although the euro itself has benefited from the improvement in German IFO data, wider front-end rate differentials and external uncertainty still dominate its direction. In the near term, the euro's path will depend on the tone of Fed officials' remarks on Friday, whether U.S. yields can rise further, and whether there are new developments in the Middle East. With both rate differential advantages and safe-haven demand favoring the dollar, the euro against the dollar still faces downward pressure, and the 1.1350 area will become a key short-term support level. (Euro against the dollar daily chart, source: Yihuitong) At 12:08 Beijing time, the euro against the dollar was at 1.1368/69.
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