The US Dollar has exhibited notable strength, with the EUR/USD dropping to its lowest level since mid-2025, driven by rising US rate expectations and a higher probability of an October Federal Reserve (Fed) hike compared to the European Central Bank (ECB) move [1][8]. However, this strength is described as 'fragile' by Commerzbank, as it appears overstretched relative to the Euro Area-US interest rate differential [1]. The US Dollar Index (DXY) trades slightly lower at 101.28, down 0.11%, but remains close to its two-month high of 101.64 [2][5]. The Dollar was weakest against the British Pound, down 0.32% today [2]. The next move for the Dollar is expected to hinge on upcoming US economic data, including the ADP Employment Change for September and the Personal Consumption Expenditure (PCE) Price Index for August [2][4][5][7].
Fed commentary has shifted market expectations. New York Fed Governor John Williams stated there is 'no need for urgency after September rate hike,' pushing back against imminent October hike bets, though he left the door open for one further hike later in the year if inflation persists [2][9]. As a result, the probability of an October rate hike dropped sharply to 44.8% from 70.9% earlier in the week, according to the CME FedWatch Tool [2][9]. Meanwhile, the ADP Employment Report is forecast to show a net increase of 72K jobs in September, nearly double August's 38K, and markets remain optimistic about US employment trends following a strong August Nonfarm Payrolls report (162K jobs, unemployment rate at 4.1%) [4][9]. Futures markets are pricing in a 70% chance of a quarter-point hike in October and 60% odds of a 50 basis point hike by year-end [4][5].
The core PCE Price Index, the Fed's preferred inflation gauge, is anticipated to rise 0.3% MoM in August, with an annualized reading of 3.4%, up from 3.3% in July [5][7]. Higher-than-expected PCE inflation would likely boost odds for upcoming rate hikes and support the Dollar, while a lower reading could pressure the Greenback [5][7]. ING analysts note that despite softer US data, rising long-dated US yields are supporting the Dollar, and the current bond slump argues against any material Dollar correction in the near term [7]. Pricing for an October Fed hike dropped to just below 50% after soft US consumer sentiment and JOLTS data [7].
FX market reactions have been mixed. USD/JPY saw 'huge action' higher in Q3, raising risks for the Yen Carry Trade, while Emerging Market FX, except for CNY, is slipping against the Dollar [3]. The Euro remains depressed near yearly lows amid soft German and French data, with concerns about France's debt weighing on sentiment [8]. ING analysts see some relief for the Euro if the Fed delays hikes until December, but warn that hot US data and an October hike could trigger further EUR/USD downside [8]. The New Zealand Dollar gained as the US Dollar weakened on easing Fed rate hike bets, supported by strong Chinese economic data [9].
Elsewhere, USD/TRY broke above 49.0, with surging fuel-driven inflation and prospects of Turkish central bank rate cuts threatening the Lira [6]. Preliminary estimates point to Turkish CPI rising by 2.2% MoM in September, with diesel and petrol prices up 12.2% and 8.1%, respectively [6].
CONCLUSION
The US Dollar's recent strength is underpinned by shifting Fed rate expectations and key economic data releases, but remains vulnerable to changes in sentiment and policy signals. Market participants are closely watching upcoming ADP employment and PCE inflation data, which will likely determine the Dollar's near-term trajectory. While the probability of an October Fed hike has diminished, persistent inflation and strong labor data could renew bullish momentum for the Dollar.