Long-term yields support the dollar; the euro pays for France

Between 9 September and 7 October, the Macro Edge dollar index rose from 98.61 to 102.41. The final part of that rise ran against the Fed's timetable. On 2 October, the BLS reported 29,000 jobs created in September, unemployment rising to 4.2% and revisions of -60,000 for July and August. The probability of an increase on 28 October, already at 37.1% on 30 September according to CME FedWatch, fell below 25% after the release according to Investinglive. The minutes of the 15 and 16 September meeting, released on Wednesday, show most participants judged an additional rise “likely appropriate” by year-end. Williams and Jefferson have since ruled out any urgency, while Bowman would prefer no further increases in 2026.

The US 10-year yield rose from 5.24% on 1 October to 5.36% intraday on 7 October, before closing at 5.28%. The same day, the Treasury auctioned $39bn of 10-year notes at 5.300%, the highest auction yield since November 2000 and 1.7bp below the grey market level. Bid-to-cover was 2.77 against an average of 2.52 over the previous ten auctions. Indirect bidders, mostly foreign, received 80.3% of the securities, and primary dealers 2.5%. Our reading is that these yields are bringing foreign capital back into US debt, supporting the dollar even as Fed pricing retreats.

This support remains fragile while prices rise faster than incomes. ISM prices paid reached 77.9 in manufacturing and 74.0 in services, the latter's highest since July 2022, while August core PCE rose only 0.2% month on month. For September CPI, TD expects +0.54% month on month for headline and +0.20% for core. This profile would describe an imported shock without wage transmission. It would undermine December's increase, when CME FedWatch assigned an 86.8% chance of at least one increase by then on 30 September, leaving the dollar dependent on long-term yields alone.

Taken alone, euro-area data would justify a firmer ECB. September flash HICP came in at 3.8% year on year, against 3.6% expected and 3.2% in August, with energy at 18.8% and core at 2.5%, in line with consensus. Flash composite PMI reached 53.1, its highest in three and a half years, while France returned to growth for the first time in ten months. The ECB raised its deposit rate to 2.50% on 10 September, and Lagarde highlighted energy's inflation risk before the European Parliament on 28 September. Yet EUR/USD lost 3.83% in a month and ended Wednesday at 1.1177, the lowest in our snapshot.

This week adds a sovereign premium to energy. On 1 October, the Lecornu government presented a 2027 budget proposing around €54bn of consolidation to bring the deficit to 5.0% of GDP in 2027, against 5.4% expected in 2026. The 10-year OAT briefly exceeded 5%, its highest since July 2002, while its spread against the Bund crossed 150bp, the highest since late 2011, against 132bp a few days earlier. Moody's, which rates France Aa3 with a negative outlook and judges budget adoption “highly uncertain”, will publish its review on 23 October. According to FXStreet, the Bank of France regards the tension as serious but believes it does not meet the conditions for ECB assistance: OAT holders have no explicit safety net.

US and French yields rise together with opposite effects: foreign buyers appear at Treasury auctions, while the widening OAT–Bund spread signals insufficient demand for French debt. We see a fragmentation premium adding to the energy bill. It would explain the euro's fall against sterling, from 0.8605 on 25 September to 0.8465, although the United Kingdom also imports energy. Our bearish euro bias holds, but a narrowing OAT–Bund spread would matter more than falling oil. Positioning limits this reading: the CFTC shows a large euro short position on 29 September. FXStreet cites a record 301,000 contracts, which we have not cross-checked; good news from France could trigger rapid short covering.

This week's oil shock comes from transport. At least four commercial vessels were hit by missiles or drones over the weekend of 3 and 4 October. Hormuz transit fell to an average of ten commodity vessels a day over ten days, its lowest since May. OPEC+ offered no relief: the seven countries meeting on 4 October held November production unchanged, a second pause following four monthly increases, and will not meet again until 1 November. US commercial inventories fell 3.2 million barrels to 424.1 million barrels in the week ending 2 October, still 1% above the five-year average.

EIA Brent spot traded at $120.03 on 2 October, up 33.77% over a month, while the nearby ICE contract traded at $100.87 on 7 October. The WTI spread reached around $22 in spot markets on 2 October and $13.80 in futures on 6 October; freight from the Gulf reached a record of around $33 per barrel. In our view, freight explains much of the spot–futures gap: the premium concerns seaborne crude and passes only partly into crude priced at Cushing. Speculators are not chasing it, as their combined WTI and Brent net long fell by 31,000 contracts to 335,000, a five-week low, in the week ending 29 September.

USD/CAD has risen from 1.3768 on 9 September to 1.4253, almost continuously, while Brent spot gained a third. The price that matters for Canada is discounted WTI, and the Bank of Canada holds at 2.25% against a Fed at 3.75–4.00%, after August employment fell by 42,000 and inflation excluding petrol stood at 2.4%. Speculators sold CAD in the week ending 29 September. September employment on Friday, followed by the BoC on 28 October, could change this profile.

The yen has completed a full round trip in a month. USD/JPY fell from 160.16 on 1 September to 153.27 on 9 September, when speculators switched to yen longs ahead of the BoJ. The central bank raised its rate to 1.25% on 18 September, a 31-year high, but two dissenting votes led to a cautious reading of the decision and the pair returned to 158.23 on 7 October. On 29 September, the yen remained one of only two currencies in which speculators were net long, with positions losing money since the 9 September low.

Ueda shifted the debate on 6 October. Core inflation is approaching 2%, and yen weakness is one of three upside risks he cites, alongside the war with Iran and AI-related demand. The market assigned only around a one-in-four chance to an October increase and targets December. Japan sold more than $70bn in late April and early May after the pair exceeded 160, then a record ¥15,400bn, around $96bn, between late July and late August beyond 163. The market places the new intervention area between 158 and 159, where the pair currently trades.

The risk appears asymmetric to us. Rising US yields and the energy bill push the pair higher, but each additional gain brings intervention closer, and the BoJ keeps December open. Weak US CPI or intervention would trigger a rapid decline, especially since not all yen buyers have closed their positions.

The bond sell-off on 7 October hit every major curve: the US 30-year reached 5.73% intraday, its highest since 2002, and the 30-year gilt returned to its highest since 1998, after reaching 6.029% intraday on 1 October. BBH sees rising term premiums driven by supply: the US Treasury auctions $119bn in 3-, 10- and 30-year securities this week, while according to Apollo hyperscalers have raised $48bn in European currencies in 2026, three times as much as in 2025. Georgieva noted that global public debt will exceed $100,000bn at the end of 2026 and approach 100% of GDP in 2030. The IMF Fiscal Monitor, published during the Bangkok meetings from 12 October, will give the detail.

Each currency depends on its country's ability to find buyers for that debt, and the United Kingdom sits between the United States and France. August CPI rose to 3.1%, with motor fuels up 23.0% year on year; the BoE forecasts inflation around 3.75% in the fourth quarter, then slightly above 4% in early 2027. On 17 September, three of nine members voted for an increase, and the statement signals likely tightening if the conflict persists. We believe this restrictive bias explains sterling's better performance: GBP/USD lost 2.41% over a month, against 3.83% for EUR/USD.

This support has two limits. The labour market is not pushing wages higher, leaving the BoE free to wait. The 28 October budget could also increase gilt supply: higher long-term yields would then weigh on sterling rather than support it, just as OAT yields weigh on the euro.