US dollar grinds higher as short-end rates remain elevated

USD: Iran delay keeps dollar rate support intact

Trump’s confirmation at the UN General Assembly that an Iran deal must wait until after the November midterms has reinforced the dollar’s consolidation. By anchoring energy prices at elevated levels for roughly seven weeks, this timeline strengthens the transmission from energy to inflation. That inflation impulse keeps the probability of a December Fed hike near 78% in OIS markets and has lifted the two-year yield to 4.75%. The resulting front-end rate support has pushed DXY to 100.8, its highest level since July, as markets price a Fed path that points to previous insurance cuts being unwound.

The Treasury curve’s compressed shape is also sustaining the greenback’s advance. With the 10-year yield pressing towards 5% while Secretary Bessent’s bond buybacks suppress the long end, the 2s10s spread sits at just 21 basis points. This flat curve signals confidence in the Fed’s policy credibility and preserves the dollar’s real-rate advantage. It also suggests that softer growth data would weigh on long-end yields before materially shifting front-end rates, limiting the currency’s exposure to negative macro surprises.

With energy risk keeping short-term rates elevated, the dollar’s sensitivity to incoming data is likely to remain low. The clearest threat to further dollar gains sits in Tokyo, where USD/JPY is trading near 157 following last week’s dovish Bank of Japan hike. Confirmed intervention by Japan’s Ministry of Finance at or above 160 could pull the dollar lower. While still a tail risk, intervention remains the most credible ceiling on near-term dollar gains, as it was the case back in July.

DXY is testing the 100.7 level, with a clean break opening the path towards 101. On the downside, the intraday low at 100.3 and the 100.00 handle provide the key support levels. Barring a forceful move from Japanese authorities, the direction over the next seven weeks remains relatively clear. Elevated energy prices, a compressed yield curve and firm front-end rates should keep the dollar supported as rates stay higher for longer. The possibility of an oil export ban could offer additional support.

EUR: Limited support despite geopolitical progress

The euro continues to struggle to capitalise on improving geopolitical headlines. Progress in US-Iran negotiations and tentative optimism around Russia-Ukraine peace discussions have helped keep oil prices contained, yet EUR/USD remains below 1.15. For now, markets remain focused on rate differentials, which continue to favour the dollar following the Fed’s latest hawkish repricing.

Both the US and eurozone economies have shown resilience, but stronger US data and a firmer Fed narrative have pushed Treasury yields higher, leaving EUR/USD on the defensive despite expectations for another ECB hike next month.

Adding to the euro’s challenges is a growing layer of political uncertainty within Europe. Fiscal concerns in France and political debates around Germany’s economic and spending agenda have resurfaced at a time when investors are already questioning the region’s medium-term growth outlook. While not yet a dominant driver, the political backdrop is making it harder for the euro to attract sustained inflows when compared with the relatively straightforward rates story supporting the dollar.

For now, the near-term bias remains lower. While our baseline still envisages EUR/USD recovering toward 1.16 by year-end, the immediate risk remains a retest of the low 1.13s unless the Fed narrative softens or Europe delivers a stronger domestic catalyst.

CAD: Loonie hits 7-week-low on widening yield spread

As mentioned on Reuters, the combination of widening rate differentials, escalating trade uncertainty and bullish technical momentum is driving USD/CAD toward fresh highs. The move comes as the US dollar strengthens broadly against most G10 currencies, including the Loonie.

The main source of Loonie weakness in recent weeks has been the widening US-Canada two-year yield spread, now at a 2026 high of roughly 150 basis points. The Fed’s hawkish rate outlook contrasts with a Bank of Canada that has held rates unchanged for seven consecutive meetings. Markets have increased the probability of an October BoC hike, but Macklem’s tougher language has not offset the dollar’s growing carry advantage.

Canadian trade risks are adding further pressure as the September 29 US import restrictions approach and Washington threatens to replace Canadian potash with Belarusian supply.

USD/CAD is trading near a seven-week high after breaking above its August peak of 1.4062 and reaching 1.409 today. The move extends the technical shift that began when the pair cleared its 55-day moving average last week and closed above 1.40 for the first time since early August. With 1.40 now acting as support, a sustained close above 1.4062 would bring the 1.41 area firmly into view.

Market snapshot

Table: Currency trends, trading ranges & technical indicators

Key global risk events

Calendar: September 21 – 25

All times are in EST

Have a question? [email protected]

*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.