The U.S. dollar is heading toward its strongest monthly performance against the euro in more than a year as resilient U.S. economic growth, elevated Treasury yields and shifting interest-rate expectations continue to support the greenback.
The dollar has gained nearly 2.3% against the euro during September, putting it on course for its biggest monthly advance against the single currency in 14 months.
The euro traded near $1.135 on Wednesday, remaining close to levels not seen since May 2025. The move highlights a widening contrast between the U.S. and euro-area economic and monetary-policy outlooks.
What Happened to the U.S. Dollar?
The dollar strengthened against most major currencies during September as investors reassessed the outlook for U.S. interest rates.
A series of economic reports pointed to a resilient U.S. economy while inflation remained persistent. Those conditions helped push Treasury yields higher and strengthened expectations that U.S. interest rates could remain elevated.
The Federal Reserve raised interest rates earlier in September for the first time in three years, adding further support to the dollar.
Why Is the Dollar Strengthening Against the Euro?
The latest move is being driven by more than one factor.
First, the U.S. economy has shown greater resilience than many investors expected. Stronger economic conditions can allow the Federal Reserve to maintain tighter monetary policy for longer.
Second, U.S. Treasury yields have climbed to multi-year highs. Higher yields can increase the relative attractiveness of dollar-denominated assets to global investors.
Finally, investors have been reassessing the difference between expected Federal Reserve and European Central Bank policy.
Euro Faces Growth and Policy Headwinds
The euro has been among the weaker G10 currencies this year as investors weigh energy pressures, government debt concerns and relatively weak economic growth in Europe.
Against the dollar, the euro traded around $1.135 on Wednesday and remained close to the May 2025 low reached during the previous session.
Expectations surrounding European Central Bank policy are also important. Markets currently expect the ECB to leave interest rates unchanged in October.
That contrasts with the United States, where investors continue to debate whether the Federal Reserve will deliver another increase before the end of the year.
Fed Rate Expectations Are Shifting Again
Although higher U.S. rates have supported the dollar, expectations for an immediate Federal Reserve hike have cooled.
New York Fed President John Williams said there was no need for urgency in raising rates again, encouraging traders to reduce expectations for an October increase.
Market pricing showed the probability of a 25-basis-point Fed rate increase in October falling to roughly 44%, down from around 70% earlier in the week.
This creates an important question for currency markets: can the dollar continue rising if expectations for an immediate rate hike weaken?
Treasury Yields Continue to Support the Greenback
U.S. Treasury yields have been another major source of dollar strength.
Long-term borrowing costs have risen sharply as investors respond to persistent inflation, higher energy prices and expectations that interest rates may remain elevated for longer.
The benchmark 10-year Treasury yield recently climbed above 5%, reaching levels not seen in nearly two decades.
Higher U.S. yields can attract international capital, increasing demand for dollars as investors purchase dollar-denominated assets.
Key Currency Market Numbers
- Dollar gain vs euro in September: Nearly 2.3%
- Monthly performance: On track for the biggest dollar gain against the euro in 14 months
- EUR/USD: Around $1.135 on Wednesday
- Fed October hike probability: Roughly 44%
- Earlier Fed hike probability: Around 70% earlier this week
- Dollar vs yen in September: Down about 1.7%
- Dollar vs yen during Q3: Down nearly 3.4%
Why This Matters for Forex Traders
The dollar’s September rally illustrates how strongly currency markets are responding to differences in economic growth, bond yields and central-bank expectations.
For EUR/USD, the key issue is whether the gap between expected U.S. and euro-area monetary policy continues to favor the dollar.
However, the dollar rally is not without risks. Expectations for another immediate Fed hike have already weakened, while new inflation and employment data could quickly change the interest-rate outlook.
That means upcoming economic reports may determine whether September’s dollar strength extends into October or begins to lose momentum.
Is the Dollar Rally Losing Momentum?
There are already signs that traders are becoming more cautious.
The dollar has risen sharply since mid-September, but technical signals have recently suggested that bullish momentum may be becoming less decisive.
That does not necessarily mean the rally is over. Instead, it increases the importance of upcoming economic data and key technical levels as traders assess whether buyers can maintain control.
What to Watch Next
1. U.S. PCE inflation: The Federal Reserve’s preferred inflation measure could influence expectations for another rate increase.
2. U.S. employment data: Signs of strength or weakness in the labor market could significantly change the outlook for monetary policy.
3. German inflation: Inflation data from Europe’s largest economy could influence expectations for the European Central Bank.
4. Treasury yields: Continued high U.S. yields could provide additional support for the dollar.
5. EUR/USD: Traders will watch whether the euro can stabilize after its September decline or whether renewed dollar demand pushes the pair lower.
GainLynx Takeaway
The dollar is ending September with strong momentum against the euro, supported by resilient U.S. growth, high Treasury yields and a relatively hawkish Federal Reserve outlook.
But the next stage of the move may depend less on what happened during September and more on what incoming inflation and employment data reveal about the U.S. economy.
If inflation remains persistent and the economy stays resilient, expectations for tighter monetary policy could continue supporting the dollar. Softer data, however, could reduce rate-hike expectations and test the strength of the recent rally.
Sources
- Reuters — Dollar set for big rise in September, mainly at euro’s expense
- Reuters — Mapping the Market: Dollar gains still possible, but signs of trouble emerge
- Reuters — U.S. markets and Treasury yields
This article is for informational purposes only and does not constitute investment advice.
