The US dollar is expected to record its largest monthly gain in 14 months in September, as economic and interest rate advantages outweigh European concerns.

1. On Wednesday, the US dollar hovered near this year’s highs against the euro and is set to record its largest monthly gain in 14 months in September. US economic growth and rising interest rates provide support, while Europe is weighed down by concerns over energy supply and debt. Overnight, the euro once fell to 1.1311 dollars, its lowest since May 2025, and is currently fluctuating near 1.1339; the euro is also testing support near 178 against the yen. 2. The US dollar has already risen nearly 2.5% against the euro in September. The strengthening dollar also caused the Australian dollar to fall below the 0.70 mark against the US dollar for the first time since early August. Brent Donnelly, President of Foreign Exchange Trading at Spectra Markets, said that the strong performance of the US economy, Europe’s lag in the global AI race, concerns over energy supply, and the French political situation are still the main worries for the euro. 3. Earlier this month, European benchmark natural gas prices rose to their highest since 2022. France will hold a presidential election next year, and the market faces pressure from debt and political deadlock, with the French-German bond spread widening to over 115 basis points, the widest since 2012. Recently, euro option skew has turned distinctly bearish, indicating the market is more inclined to hedge against further euro weakness. However, Donnelly noted that for the dollar to continue strengthening from current levels, strong US data may still be needed. 4. The US dollar rose to 0.8357 against the Swiss franc overnight, reaching a new 16-and-a-half-month high. The Swiss franc’s weakening is partly due to investors seeking other low-yielding currencies as alternatives to the yen for carry trade financing. With joint US-Japan purchases of the yen in July and August, Japan's repeated warnings to defend the exchange rate, and the acceleration of rate hikes, the yen is no longer favored as a short-dollar target. In September, the US dollar has fallen 1.5% against the yen. 5. The Federal Reserve’s preferred inflation gauge, the core PCE, will be released on Wednesday night, but the market is more focused on Friday’s non-farm payrolls report. If the data is strong, it may reinforce expectations of rising US interest rates. After New York Fed President Williams said there is “no need to rush” to raise rates, some expectations were dampened: the 2-year US Treasury yield fell by about 3.5 basis points, and the probability of a rate hike next month on federal funds futures dropped from 71% to 50%.