Dollar Surges to 18-Month High as Europe's Fiscal and Economic Woes Provide Tailwind

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Summary · why it matters

The dollar has surged to an 18-month high in foreign exchange markets, buoyed by uncertainty over Europe's economy across the Atlantic and by some investors betting on further gains for the greenback. The dollar has risen about 5% against the euro so far this year, and concerns that France's massive fiscal deficit and its spillover effects could spread to Italy and the wider euro area are likely to be the main driver of the dollar in the coming months. The yield gap between French and German 10-year government bonds recorded its widest weekly expansion in decades last week, and the yield spread between Italian and German government bonds also reached its widest since the COVID-19 pandemic. The euro fell 0.67% against the dollar from the previous week. The European Central Bank raised its policy rate by 25 basis points in September, but the euro fell after the governing council's decision as markets worried about the negative economic impact of higher rates, and one concern is that hawkish signals have not provided much support for the euro.

Impact on assets 5

Others± Mixed
％France Government Bond 10Y
FR-10Y
▲ PositiveMonetaryrelevance

France's massive fiscal deficit concerns drove the French-German 10Y yield spread to its widest weekly expansion in decades, pushing French yields up.

％Italy Government Bond 10Y
IT-10Y
▲ PositiveMonetaryrelevance

Contagion fears from France's fiscal woes pushed the Italian-German 10Y yield spread to its widest since the COVID-19 pandemic, raising Italian yields.

％Germany Government Bond 10Y
DE-10Y
▼ NegativeMonetaryrelevance

German 10Y yield spread vs France widened to its widest weekly expansion in decades, implying German yields fell relative to French as safe-haven demand favored Bunds.

％ECB rates
ECBRATES
± MixedMonetaryrelevance

ECB hiked 25bp in September but the euro fell as markets worried about the negative economic impact of higher rates; article notes hawkish signals failed to support the euro.

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