US Dollar Eases Amid Shifting Fed Expectations and Weaker Oil Prices
The US dollar eased from two-month highs as the implied probability of an October Federal Reserve rate rise fell from 72% to 45%, alongside weaker oil prices. The dollar index again struggled above 101, a level that has capped rallies for more than a year: the rebound in May 2025 stalled there, as did the June–July recovery from early-2026 lows. Even with the pullback, the currency is set to finish September with its best showing since June, after a hawkish policy tone and long-end Treasury yields pushed to 24-year highs helped drive a three-week advance.
Foreign Exchange Movements: Yen, Euro, and Sterling
In foreign exchange, the yen rose to two-week highs on repeated official jawboning and expectations that the Bank of Japan could lift the overnight rate from 1.25% to 1.5% as early as its October meeting, a divergence that would keep USDJPY under pressure if the Fed stands pat. In Europe, the euro drifted towards 16-month lows, just above 1.1300, as higher bond yields were framed as tightening financial conditions and reducing the need for further action by the European Central Bank. Sterling steadied with GBPUSD supported by the dollar’s retreat, while UK diesel prices hit record highs and one-month implied volatility climbed to its highest level since July ahead of the budget.
