Dollar Nears 17-Month High as French Budget Sinks Euro

Summary

The dollar hovered near a 17-month high and headed for a third weekly gain as the euro slumped after France's budget failed to ease fiscal worries, pushing the French-German yield spread to its widest since 2012. Treasuries rallied overnight after yields hit 24-year highs. Nasdaq futures rose while European futures pointed slightly lower. Brent held around $102 on reports of more US troops heading to the Middle East and China suspending oil product exports.

Equities

The FTSE 100 fell 1.68% to 10,428.7 on Thursday, October 1, closing at a three-month low and extending its losing streak to four sessions. The FTSE 250 fell 1.62% as sharp increases in UK government bond yields weighed on shares.

Banks led the declines. HSBC and Barclays each closed about 4% lower, while NatWest fell 5.4% on Thursday as gilt yields rose and concerns grew ahead of the UK budget later this month. The UK 30-year gilt yield reached 5.9352%, its highest since early 1998, while the 10-year yield climbed to 5.4033%, its highest since 2007.

Homebuilders also fell, with the sector down 4.9% as higher borrowing costs weighed on sentiment. British house prices recorded their weakest annual growth since December 2025. Breedon Group closed 3.4% lower after appointing James Brotherton as its new group CEO, succeeding Rob Wood.

US stocks recovered from early losses on Thursday as Treasury yields retreated from multi-decade highs. The Dow Jones Industrial Average closed 0.04% higher at 50,926.74, the S&P 500 rose 0.20% to 7,666.48 and the Nasdaq Composite gained 0.04% to 26,871.60.

The US 10-year Treasury yield had reached a 24-year high before reversing lower, while the two-year yield fell about 10 basis points after Federal Reserve Vice Chair Philip Jefferson said the central bank could be patient before raising rates again. US weekly initial jobless claims fell to 197,000, below the 200,000 forecast, while manufacturing activity remained firm and input prices increased.

Energy shares rose 1.9% on the S&P 500 as Brent crude gained more than $4 a barrel after China suspended fuel exports. Accenture closed at its highest level since March 6 after forecasting full-year revenue growth above expectations, while Micron Technology rose 3% after issuing a stronger-than-expected revenue forecast and announcing $32 billion in customer commitments.

Forex & Commodities

The US dollar was up early on Friday, heading for a third consecutive weekly gain as the euro remained near its lowest level since May 2025. The euro was down at $1.124, while the dollar index was at 101.9 and set for a 1% weekly gain. The pound was also down against the dollar, having fallen to a three-month low before steadying. The yen was up at 157.8 per dollar after Tokyo data showed core inflation accelerating in September at its fastest pace in 10 months.

The latest US inflation data showed consumer prices rose less than expected in August, with July's increase also revised lower. Traders have subsequently reduced expectations for a Federal Reserve rate increase this month, with markets pricing a 72% chance that the Fed will leave rates unchanged in October, compared with 36% a week earlier. Investors were awaiting the September payrolls report later on Friday, with job growth expected to slow and unemployment forecast at 4.1% for a third consecutive month.

Spot gold was little changed early on Friday at $4,188 an ounce and was down more than 2% for the week. Higher Treasury yields and a stronger US dollar have weighed on the metal, while traders were waiting for the payrolls data for further indications on the Fed's interest-rate path. Markets were pricing about a 26% chance of an October rate increase, down from around 70% earlier in the week, while the probability of a December increase remained around 80%.

Oil prices were down early on Friday after rising sharply on Thursday. Brent crude fell to $101.6 a barrel, while West Texas Intermediate dropped to $92.02, with both contracts heading for weekly declines. Traders were assessing signs of improving Middle Eastern supply alongside uncertainty over US-Iran developments, while China has halted refined fuel exports for October.

The US has also asked France and Germany to release emergency diesel inventories to help ease fuel prices, with the administration seeking the release of 120 million barrels of diesel over six months.