The September surge in the US dollar index pushed it back above the 100 mark, and through October the greenback has continued to trade at elevated levels.
Analysts argue that this latest round of dollar strength was not driven by US fundamentals alone, but rather by the combined effect of shifting US monetary policy expectations and fiscal risks in the eurozone.
It is worth noting that the ebb and flow of the dollar transmits through northbound capital flows and onshore-offshore price spreads into A-shares and China's domestic commodity markets, and the sensitivity of different assets to dollar swings varies markedly, meaning the market must guard against multiple risks arising from exchange rate volatility, changes in financing costs, and cross-border liquidity mismatches.
Where the dollar's strength came from
Pan Xiang, a financial futures and derivatives analyst at Nanhua Futures, said September's dollar rally was propelled by two forces: US nonfarm payrolls came in below expectations, with July and August figures sharply revised down, and Fed officials struck a dovish tone, cooling market expectations for an October rate hike. That factor lifted the dollar but its effect is fading at the margin. The genuine new driver was political and fiscal risk in the eurozone, where concerns over France's deficit pushed the spread between French and German government bonds wider, posting the largest single-week increase in decades and pressuring the euro lower. Since the euro carries the largest weight in the dollar index, its slide directly drove the index higher.
Zheng Hong, chief macro analyst at Zheshang Futures, similarly attributes this round of dollar strength to a twin engine of "rising US Treasury yields plus weak European fundamentals." On one hand, the Fed's September policy meeting voted 12-0 to raise rates by 25 basis points, lifting the federal funds target range to 3.75%-4.00%, and the dot plot pointed to a median expectation of further hikes this year, while a rising term premium pushed long-end Treasury yields higher, lifting yields across the curve and underpinning the dollar. On the other hand, brewing European fiscal risk triggered capital outflows from the euro, and a weaker euro helped push the dollar index up.
How much further can the dollar climb?
Looking ahead, the room for further dollar gains may narrow, as market pricing of the Fed's policy path for the rest of the year has clearly turned dovish: the probability of an October hike briefly rose to about 71% in late September, fell below 50% after the PCE data was released on September 30, and dropped further to around 22% after the nonfarm payrolls report on October 2. If US economic data keeps weakening, the momentum behind continued dollar strength will gradually fade.
"In the short term, as long as European fiscal risk has not subsided, the dollar can still draw passive support; once European fiscal risk stops escalating, that support will dissipate," Pan Xiang said. Over the medium to long term, the Fed's rate hike cycle has not yet ended and the market's focus will ultimately return to inflation fundamentals, with the inflation observation window still open, leaving a base of support beneath the dollar.
How dollar swings ripple into domestic commodities
Bian Shuyang, a senior director at the Nanhua Futures Research Institute, explained that dollar volatility transmits to China's A-share market and commodity futures market through two channels: northbound capital flows and onshore-offshore price spreads. In terms of transmission channels, different commodities show markedly different sensitivity to dollar swings: precious metals and base metals are most affected. Shanghai gold and Shanghai silver prices are suppressed by real interest rates, coming under valuation pressure in a strong-dollar environment and only likely to recover once the dollar peaks and retreats. Shanghai copper prices are the most sensitive to the dollar and US Treasuries, with their influence transmitted through the Shanghai-London ratio, but low inventories provide support, giving Shanghai copper an overall pattern of "the dollar sets direction, inventories set magnitude." Energy and chemicals prices do not simply track the dollar: SC crude oil, methanol, and EG prices lean more on the Brent-SC crude price ratio, the situation in the Strait of Hormuz, and Iran-related shipping schedules. A stronger dollar raises import parity prices, making domestic prices relatively more resilient. Within the ferrous complex, iron ore prices absorb dollar volatility through transmission paths including Singapore swaps, the Platts index, and freight rates, but prices are ultimately still determined by domestic steel mill demand and the property sector, while rebar and glass prices are driven more by domestic factors. Among agricultural products, soybean meal, soybean oil, and palm oil prices indirectly reference the cost of US soybeans and Malaysian palm oil combined with RMB exchange rate conversion. A strong dollar raises import costs, but it is hard for it to change the core logic that supply and demand dominate prices.
"Overall, the dollar is currently in a phase of high-level oscillation. Domestic commodity trading can prioritize the price direction of precious metals and copper, onshore-offshore spreads and geopolitical conditions in energy products, and the tug-of-war between the dollar cost of iron ore and domestic demand. Other products are mainly affected only at the sentiment level," Bian Shuyang said.
Zheng Hong added observations on asset-side transmission, saying that in the A-share market, foreign trading behavior is mainly influenced by the global interest rate environment. Under the Fed's tightening cycle, northbound capital has continued to flow out of high-valuation growth sectors, which have become a key area for foreign investors to trim positions.
Risks to watch
On risk prevention, Pan Xiang reminded that industrial clients and traders need to focus on two types of risk. The first is the dual uncertainty of exchange rate volatility and interest rate costs. In the short term, European fiscal risk could still cause pulse-like dollar rallies, and companies with dollar purchase exposure that have not hedged should not bet one-sidedly on the direction of the exchange rate; if US inflation data rebounds later, the dollar may strengthen again, raising the cost of buying foreign exchange. At the same time, US Treasury yields are at multi-year highs, dollar financing costs remain elevated, and floating-rate debt expenses face the risk of further increases. The second is the liquidity mismatch risk brought by the spread of European fiscal risk. If European fiscal risk spreads further, it could easily trigger a global liquidity shock, and cross-rate spreads for some emerging market currencies and non-US currencies could widen abnormally.
Zheng Hong believes that with the dollar index and US Treasury yields both at elevated levels, global capital continues to flow back into dollar assets. Against this backdrop, although US Treasury prices are suppressed by rising rates, the significant yield advantage continues to attract global capital into short-dated Treasuries. In an environment of Fed tightening and a strong dollar, US tech growth stocks with earnings support, buoyed by improving AI profits, are offsetting the drag of high rates on valuations and are more attractive than risk assets in other countries, further reinforcing the capital siphon effect of dollar assets. Non-US equity markets may face multiple pressures of capital outflows, local currency depreciation, and declining valuations, and warrant close attention.
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