The dollar continues to trade near its highest level in 18 months, supported by cautious market sentiment as tensions in the Middle East intensify and investors await US inflation data. Oil market volatility has also increased after continued attacks on Saudi energy facilities and oil tankers, while the announcement of an energy ceasefire between Russia and Ukraine weighed on Brent crude, pushing it toward $103.3 per barrel. Despite a slight decline in the Dollar Index to 102.16, it retained most of its recent gains, particularly as liquidity remained thin during the Asian session due to the Japanese market holiday.
Geopolitical risks remain a direct source of support for both the dollar and energy prices, especially with expectations that attacks on Saudi energy infrastructure could continue. Meanwhile, the chances of a rapid breakthrough involving Iran remain limited. Currency market moves were relatively subdued, with the dollar edging lower against the yen while the Australian and New Zealand dollars remained broadly stable.
Market attention now turns to US inflation data due on Wednesday, which is expected to play an important role in shaping interest rate expectations ahead of the Federal Reserve meeting at the end of October. US consumer confidence weakened at the beginning of the month as living costs continued to rise, while the latest rate increase brought the prospect of further monetary tightening back into focus. Even so, current market pricing suggests a strong probability that rates will remain unchanged this month. A stronger than expected inflation reading could reopen the possibility of another rate increase in December or January.
Bond markets remain one of the main sources of concern after global borrowing costs climbed to levels not seen in decades. Inflation, energy prices and expanding government debt are the three main pressures behind the move. Persistently high yields weigh on asset valuations and increase the appeal of the dollar, while also raising the risk of greater volatility across equity and credit markets.
The euro continues to face pressure linked to France despite edging higher to $1.121. Five consecutive weeks of losses reflect persistent concern over French public finances, while the spread between French and German bond yields has widened to 137 basis points. These levels continue to place pressure on the single currency, and any euro recovery may remain limited as Europe faces weak economic fundamentals and structural challenges.
The Japanese yen is also showing an important change in the nature of the pressure affecting the currency. Since 2025, its depreciation has occurred entirely during London and New York trading sessions, while performance during Tokyo hours has improved alongside Japan’s stronger balance of payments. At the same time, strong Japanese equities linked to artificial intelligence and increased currency hedging by international investors have contributed to yen selling outside the domestic market. Expectations that the Bank of Japan would raise interest rates only gradually have added to this pressure.
This picture has started to shift following coordinated intervention in the currency market and growing expectations that monetary tightening in Japan could accelerate. The proportion of investors holding a bearish view on the yen fell from 60% in August to 30% in September, pointing to a clear change in sentiment. With Japanese interest rates expected to rise gradually toward 2% by mid 2027, the prospects for a medium term recovery in the yen are improving.
Risks surrounding USD/JPY are becoming more tilted toward a decline if the Bank of Japan continues tightening monetary policy. The 160 level remains particularly sensitive because a move above it could revive expectations of official intervention. A significant correction in artificial intelligence related equities could also weaken global risk appetite and encourage investors to unwind currency hedges, providing further support for the yen even if the dollar remains strong globally.
You can now benefit from LDN company’s services through the LDN Global Markets trading platform.
