The US dollar remained close to a 17-month high on Friday, showing continued strength despite a decline in expectations for an immediate Federal Reserve interest-rate increase.
The Dollar Index (DXY) was trading around 102.00 and was on track for a third consecutive weekly gain. The index had risen about 1% during the week, indicating that changing expectations around US monetary policy had not significantly reduced demand for the greenback.
Dollar Strength Persists Despite Lower Fed Rate Expectations
Markets have sharply reduced expectations of an October Federal Reserve rate increase. Traders were assigning roughly 25% to 28% probability to an October hike, compared with about 70% a week earlier.
Despite that shift, US Treasury yields remained elevated. The 10-year Treasury yield was near 5.25% after briefly reaching 5.34%, its highest level since 2002.
Higher US yields can continue to provide support for the dollar by maintaining the relative attractiveness of dollar-denominated assets.
Euro Weakness Adds to Dollar Index Support
Developments in Europe have provided another source of support for the US currency.
French government bonds faced pressure as investors assessed concerns surrounding the country's fiscal position. At the same time, the euro declined about 2.5% during September.
EUR/USD was trading near $1.1240 in early Friday activity, with the euro remaining close to its weakest level since May 2025.
The euro is particularly important for the DXY because it accounts for approximately 57.6% of the index's weighting. As a result, significant euro weakness can lift the dollar index even when the US currency is not moving uniformly against every major currency.
Yen Faces Its Own Policy Catalyst
The Japanese yen is also being closely watched by currency traders.
Tokyo's core inflation accelerated to 2.7% in September, potentially strengthening expectations for additional monetary-policy tightening by the Bank of Japan.
Such expectations could provide support to the yen. However, the USD/JPY exchange rate remains influenced by US Treasury yields and the difference between expected interest rates in the United States and Japan.
Other major currency pairs were also being monitored, with GBP/USD around $1.32 and USD/JPY near 158, while USD/CAD traded close to 1.4220.
US Payrolls Become the Next Major Market Test
The focus is now turning to the latest US employment report, which could provide fresh clues about the strength of the American economy and the Federal Reserve's policy direction.
Economists were expecting September to produce around 90,000 new jobs, with the unemployment rate at 4.1%. Annual wage growth was forecast at approximately 3.2%, compared with 3.1% in August.
Wage growth is particularly important because stronger pay gains can contribute to inflationary pressure, while weaker wage momentum could reinforce expectations for a less restrictive monetary-policy outlook.
Revisions Could Change the Market Reaction
Investors will also be paying attention to revisions to earlier employment figures.
The US economy was reported to have added 162,000 jobs in August, a stronger result than expected at the time. Economists were anticipating a downward revision to that figure.
A September jobs report that initially appears reasonably strong could therefore receive a more cautious interpretation if previous employment numbers are revised significantly lower.
That combination could affect Treasury yields, expectations for Federal Reserve policy and the direction of the dollar.
What Traders Are Watching
The dollar's recent rally is being shaped by several factors rather than a single development. US bond yields, Federal Reserve expectations, European fiscal concerns, movements in the euro and yen, and incoming employment data are all influencing currency markets.
For businesses with international transactions, changes in exchange rates can affect overseas payments, imports, exports and other cross-border financial obligations. Proper International Tax planning can also become relevant when currency movements intersect with international tax considerations.
The upcoming US payrolls report could therefore become an important near-term test for whether the dollar can maintain its recent momentum or whether changing expectations around the US economy begin to challenge the rally.