USD: the bond market does the Fed's talking
The US dollar advanced against every major currency apart from the yen over the week, with gains of a little over 1% against the Australian and Canadian dollars and a little under 1% against the euro, as long-dated Treasury yields climbed to levels not seen since 2007 and a succession of Federal Reserve officials argued that September's increase was unlikely to be the last. The dollar index reached its highest level since late July on Thursday before easing back on Friday.
In the United States, Wednesday's flash purchasing managers' indices did as much work as any official. The composite reading rose to its strongest level since 2021, with services leading the advance, but the detail that mattered was on the price side, where input costs rose at their fastest pace in four years. Markets interpreted the survey as an inflation story rather than a growth story, and pricing for a further increase at the October meeting rose to around two-thirds.
Officials were happy to lean into that reading. Philadelphia Fed President Anna Paulson said the Committee may need to raise rates again and that the most that could be said for inflation was that it had not worsened, while Cleveland Fed President Beth Hammack argued that policy is still not restrictive. That second remark carries more weight than it first appears: a central bank that describes itself as not yet restrictive is describing a destination rather than a pause, and the bond market repriced the long end of the curve accordingly.
The breadth of the move said something too. Gold fell more than 2% over the week despite a geopolitical backdrop that would ordinarily support it, and oil swung back and forth on headlines from the US-Iran talks without settling anywhere, which leaves higher real yields as the one consistent explanation for what markets did. Taken together, the dollar is being carried by the rate story rather than by safe-haven demand, which is a sturdier footing for as long as the data cooperates.
Attention now turns to a heavy week of US data, beginning with the personal consumption expenditures deflator on Wednesday, the Committee's preferred measure of inflation, which is expected to show both headline and core prices accelerating. The ISM manufacturing survey follows on Thursday, and Friday's payrolls report closes the week, with jobless claims running close to their lowest levels in months and several desks flagging the risk of a firmer number than the modest gain expected.
A strong combination of inflation and employment would go a long way towards settling the October question and would test whether the long end of the Treasury market has further to run. The talks in New York remain the other variable worth watching, because progress towards reopening the Strait of Hormuz would take some of the urgency out of the energy-driven inflation narrative on which much of the Federal Reserve's recent guidance rests.
For now the dollar enters the week with momentum, a clear policy story and a bond market that keeps confirming it. The risk is less a rival central bank than a ceasefire, since a tightening cycle justified by an oil price is only as durable as the oil price.
EUR: the right data in the wrong week
The euro lost a little under 1% against the US dollar over the week, slipping below 1.14 to its lowest level in almost two months, though it gained modestly against sterling, as the strongest set of euro area business surveys in more than three years was overwhelmed by the rise in US Treasury yields and the hawkish tone coming out of the Federal Reserve.
In Europe, Wednesday's flash purchasing managers' indices surprised on almost every measure. The composite reading rose to 53.1, its highest since the spring of 2023 and well above the modest decline that had been expected, with services leading and new orders growing at their fastest pace in more than four years. Germany's Ifo business climate survey confirmed the tone, reaching its highest level in more than three years. The less comfortable detail was that the surveys showed energy-driven price pressure beginning to broaden into the domestic economy, which is precisely the second-round effect the European Central Bank raised rates to 2.50% earlier this month to contain.
Markets interpreted the data as supportive of further tightening, and money markets now carry at least one more increase by year-end with a meaningful chance of a second. Yet the euro lost ground regardless, and the reason is that the single currency is caught between two competing forces: a domestic economy giving Frankfurt every reason to keep tightening, and a Federal Reserve that is tightening from a higher starting point and with a bond market that is doing half the work for it. The euro's weakness this week was relative rather than absolute.
It helps to remember why an energy shock sits differently on the euro than on the dollar. The euro area imports almost all of its oil and gas, so a higher energy price is a transfer of income out of the region and a deterioration in its terms of trade, whereas the United States is a net energy exporter for which the same price is closer to neutral. That asymmetry means an energy-driven tightening cycle tends to favour the dollar even when both central banks are moving in the same direction.
Attention now turns to the inflation data, with the German figures on Wednesday and the flash euro area harmonised index on Friday. After a set of surveys that pointed to broadening price pressure, a firm core reading would strengthen the case for a move before the end of the year and would give the euro some support against a dollar that has had most of the rate argument to itself.
Beyond that, commentary from Governing Council members will be read for any sense of urgency about the next step, and the US personal consumption expenditures deflator and payrolls report will set the tone for the pair in absolute terms. The course of the US-Iran talks, through its effect on the oil price, matters more for the euro than for almost any other major currency given the region's dependence on imported energy.
GBP: a hawkish Bank the market does not quite believe
Sterling was among the weaker currencies over the week, losing around 1% against the US dollar and giving ground against the euro, as it slid for four consecutive sessions to sit just above 1.32 on Friday, close to its lowest level in three months. The pound's underperformance came in a week when a senior Bank of England official moved openly towards a rate increase, which says a good deal about how markets are currently weighing growth against inflation in the United Kingdom.
Domestically, Wednesday's flash purchasing managers' indices set the tone. The composite reading slowed to 51.7 and fell short of expectations, with the services sector responsible for the disappointment, while S&P Global described a combination of sluggish growth and intensifying inflation pressure, with weak business confidence and high costs continuing to discourage hiring. The currency fell sharply once the US surveys were released later the same day and showed an economy moving in the opposite direction.
On Thursday, Deputy Governor Sarah Breeden said that as the risks crystallise it becomes "increasingly appropriate" for Bank Rate to respond, and warned that waiting too long for evidence of second-round effects from energy prices could be something policymakers come to regret. Markets interpreted the speech as a meaningful shift from a member who had not been ready to vote for a move in September, and November now carries most of an increase in the price.
The difficulty for sterling is that a rate increase delivered into a slowing economy is a different proposition from one delivered into a strong one. When a central bank tightens because inflation is being imported through energy rather than generated by demand, markets tend to treat the move as a cost to growth rather than a reward for holding the currency, and the pound's reaction this week was consistent with that reading. Hawkish rather than supportive is the best description of the Bank's current position as far as the exchange rate is concerned.
Attention now turns to a quieter domestic calendar, with the final estimate of second-quarter growth on Wednesday the main local release and a handful of Monetary Policy Committee speakers through the week. Any sign that the members who voted to hold in September are moving towards Breeden's position will be closely watched.
A run of commentary that reinforces the November pricing, set against firm US data, would leave sterling trading on its growth problem rather than its rate advantage. Conversely, a softer US inflation or payrolls print would take pressure off the dollar and give the pound room to recover some of this week's losses, particularly against the euro, where the gap in growth momentum is currently most visible.
JPY: officials say what the Bank would not
The yen finished the week little changed against the US dollar but stronger against almost everything else, gaining around 1% against sterling and more against the Australian dollar, after a Friday rally that was its best single day in more than two weeks reversed most of the ground it had lost to rising US yields. The recovery came from Tokyo and Washington rather than from the Bank of Japan.
Earlier in the week the yen had been drifting in the direction that last week's rate increase was supposed to prevent. Markets interpreted the Bank of Japan's move as a dovish hike, delivered with little suggestion of what might follow, and with US Treasury yields climbing to multi-year highs the dollar pushed to 159 on Thursday, its strongest level against the yen in around four weeks and uncomfortably close to the 160 level the market associates with official action.
Officials responded with words rather than orders. Finance Minister Satsuki Katayama said on Thursday that the principles underpinning July's coordinated intervention with the United States remained in place, and on Friday said President Trump had raised concerns about the yen during his meeting with Prime Minister Sanae Takaichi earlier in the week. Reports that Treasury Secretary Scott Bessent had discussed the desirability of a stronger yen with Katayama added to the effect, and the yen outperformed every other major currency on the day.
The distinction between Japanese and joint intervention is what gives these comments their weight. When the Ministry of Finance sells dollars on its own, it is spending finite reserves against the full depth of the market, and traders know it. When Washington is visibly on the same side, as it was in July, the market is no longer testing Japan's reserves but the willingness of the United States to see its own currency weaker, which is a considerably more uncomfortable position to trade against.
Attention now turns to the Bank of Japan's quarterly Tankan survey on Thursday and the Tokyo consumer price index on Friday, the second of which offers the earliest read on whether domestic inflation is firm enough to justify a quicker follow-up to September's increase. A stronger print would help the Bank's credibility more than the yen's, given how much of the currency's direction is now being set offshore.
The US personal consumption expenditures deflator on Wednesday and Friday's payrolls report are therefore the releases that matter most for the pair, and any further official commentary will be closely scrutinised given how close the dollar came to 160 this week. Markets will be watching closely for whether the language moves from principles to preparedness.
CAD: the rate gap outweighs the oil price
The Canadian dollar lost a little over 1% against the US dollar over the week, its third consecutive weekly decline, leaving the US dollar above 1.41 and at levels last seen in mid-July, while it held up slightly better against the Australian dollar and sterling. The move came despite Brent crude spending the entire week above $100 a barrel, which in a textbook world would have given the currency meaningful support.
The explanation lies in the policy gap. The Bank of Canada has kept its policy rate at 2.25% and has said it sees little evidence that higher energy prices are spreading into broader inflation, while the Federal Reserve has begun tightening from a range of 3.75% to 4.00% and has signalled more to come. Markets interpreted that divergence as the dominant input for the currency this week, particularly as US short-dated yields rose to their highest levels in two decades and widened the front-end differential further in the US dollar's favour.
Governor Tiff Macklem added to the pressure by warning that tariffs could push Canadian growth below 1% in the fourth quarter, a reminder that the trade relationship with the United States remains a larger swing factor for the economy than the oil price. A central bank worried about growth is not one that will match the Federal Reserve step for step.
The oil relationship itself deserves a word. An oil price driven by a supply disruption in the Middle East is not the same as one driven by strong global demand, because the former raises costs for Canada's trading partners and weighs on the global growth outlook even as it lifts export receipts. That is why the loonie has not behaved like an oil currency for several weeks, and why it is unlikely to until the rate story changes.
Attention now turns to the July gross domestic product figures, which will give the Bank of Canada its clearest read yet on whether the tariff drag Macklem described is already visible in activity. A soft number would reinforce the market's view that the Bank is some distance from following the Federal Reserve, and would leave the currency trading on the rate gap for a while longer.
Beyond that the week belongs to the US calendar, with the personal consumption expenditures deflator on Wednesday, the ISM manufacturing survey on Thursday and payrolls on Friday. The US-Iran talks are the wild card, although this week showed that even a sharp move in crude may do less for the Canadian dollar than the relative path of interest rates.
CHF: the SNB stands down its warnings
The Swiss franc lost around 0.8% against the US dollar over the week but outperformed most of the crosses, gaining ground against sterling and the Australian dollar, as the Swiss National Bank left its policy rate at zero on Thursday and signalled that the extra readiness to intervene it had flagged during the franc's summer strength was no longer needed.
The decision itself was fully expected, but the language was not. The Bank returned to its standard wording on foreign exchange intervention, and President Martin Schlegel explained that the heightened stance had been a response to appreciation pressure that has since eased as the franc has weakened over the past couple of months. Markets interpreted the change as a shift in emphasis rather than in policy, since the Bank remains willing to act if needed, but the direction of that emphasis has now turned from the currency towards inflation.
That turn was reinforced by the forecasts. The Bank raised its inflation projection for every year of its horizon, to 0.7% for this year and 0.8% for each of the following two, a modest revision in absolute terms but a meaningful one for a central bank that spent much of the past year worried about prices falling. The same afternoon the Norges Bank raised rates while the Riksbank held, leaving Switzerland as the clearest example in Europe of a central bank choosing to sit out the tightening cycle.
For the franc, the practical effect is a currency with less protection on one side and more room on the other. The Bank is no longer leaning against strength, which leaves the franc freer to respond to safe-haven demand if geopolitical tension returns, while a zero policy rate in a world of rising yields continues to make it the natural funding currency when risk appetite is steady.
Attention now turns to Thursday's consumer price index, the first release since the Bank lifted its forecasts and one that will be closely scrutinised for any sign that energy costs are feeding into domestic prices more quickly than the new projections assume.
A firmer reading would give the market reason to start pricing the possibility that zero is not the end point, and would support the franc against the currencies of central banks that are already tightening into slowing growth. Conversely, a benign print would confirm that the Bank can afford to wait, and would leave the franc trading largely on the dollar's momentum and on the course of the US-Iran talks, where any breakdown would bring safe-haven demand quickly back into play.
NZD: five weeks lower and the Bank still hesitant
The New Zealand dollar lost around 1% against the US dollar over the week, its fifth consecutive weekly decline, leaving it in the mid-0.56s and close to its late-June lows, although it gained modestly against the Australian dollar, which had a worse week still. The currency was caught in the same rise in US yields that pressed on every risk-sensitive currency, with little in the domestic story to offset it.
Across the Tasman the one moment of support came early. Reserve Bank Governor Anna Breman said in a speech on Monday that if higher oil prices persist, near-term inflation is likely to run somewhat above the Bank's September forecast, and the kiwi rose to around 0.574 on Tuesday, recovering from a ten-week low. Markets interpreted the remarks as keeping an October increase firmly in play, but the move faded within a day as the US data and the Federal Reserve's commentary took over.
The deeper problem is the shadow cast by the September decision. The Bank raised its official cash rate to 2.75% last month but signalled a slower pace of increases than markets had been expecting, and that guidance has underpinned more than a month of decline. A central bank that tightens while telling the market to expect less than it had assumed is, for currency purposes, delivering a cautious rather than a confident message, and the exchange rate has treated it that way.
For now the New Zealand dollar sits between a domestic inflation story that argues for more and a policy framework that keeps promising less. Until one of those gives way, the currency is likely to take its direction from Washington rather than Wellington.
Attention now turns to the offshore calendar, which again looks likely to settle the kiwi's direction given the absence of major domestic releases. The Reserve Bank of Australia's decision on Tuesday matters for the cross, and the Chinese purchasing managers' indices in midweek will be closely watched given the importance of Chinese demand for New Zealand's exports.
The US personal consumption expenditures deflator on Wednesday and Friday's payrolls report remain the two events most capable of moving the pair, while any further commentary from Reserve Bank officials will be read in the light of the 28 October decision and Breman's warning about the oil price.