Dollar Stays Pricey, Euro Feels the French Chill, Pound Faces Policy Pressure.

  • USD: Dollar remains expensive to short; high carry and lack of fresh data keep DXY range-bound but firm.

  • IMF Data: Central banks aren’t selling dollars — private sector hedging is driving FX moves.

  • EUR: French political uncertainty adds downside risk; a wider OAT:Bund spread could deepen euro weakness.

  • GBP: Fiscal slippage and potential tax hikes weigh on sentiment; rate cuts expected from both BoE and Fed.

  • Outlook: Gradual dollar weakening expected into 2026 as US rate cuts and global hedging pick up.

USD: Hard to Bet Against

The dollar index (DXY) has gained modestly this week, driven mainly by yen weakness — the yen accounts for around 14% of the index. Meanwhile, shorting the dollar remains costly, with one-week interest rates sitting near 4.15% per annum. Without fresh US data to shift sentiment, traders are finding little incentive to add to short-dollar positions.

Recent IMF COFER data also challenges the notion that central banks have been offloading dollars. Adjusted for exchange rates, the dollar’s share of global FX reserves stayed steady around 57% in Q2 2025. This suggests the recent dollar selling likely came from private investors increasing hedges on their US assets. As these hedge ratios rise further and the Fed trims rates by another 100bp over the next nine months, a gradual dollar softening looks likely.

Today’s focus is on potential August trade data, where a narrower deficit is expected, as well as speeches from Fed members Bostic, Bowman, and Miran. However, markets remain confident that two more Fed cuts are still on the table for this year. Given external factors like developments in Japan and France, DXY should stay range-bound, leaning slightly to the upside.

EUR: Politics Clouding the Euro

France’s political scene continues to cast a shadow over the euro. Reports suggest President Macron has given outgoing Prime Minister Sebastien Lecornu until Wednesday to build a working coalition in a fragmented parliament. Should that fail, the options could range from a technocrat-led government to early elections.

Markets currently assign a 57% chance of elections being called before month-end, though analysts doubt they would resolve the political stalemate. FX traders are watching the French-German OAT:Bund yield spread closely — a move above 90bp could spark renewed euro weakness. For now, EUR/USD is finding some support near 1.1650, though downside risks are accumulating absent new catalysts from the US side.

GBP: Fiscal Strain Meets Limited Upside

The pound has recovered from late-September lows near 1.3330 but remains capped below 1.3500 against the dollar. MUFG maintains a cautious outlook on both the pound and the dollar versus the euro but expects GBP/USD to gradually rise to 1.40 by Q3 2026 — largely dependent on deeper Fed rate cuts.

Domestically, fiscal concerns continue to weigh. The OBR reports government borrowing roughly £12bn above target this fiscal year, fuelling speculation of further tax increases. MUFG warns that such measures could hurt spending, investment, and confidence — all short-term drags on the pound.

With the UK labour market showing signs of softening, the Bank of England is expected to cut rates again this year, followed by two more in 2026. Similarly, MUFG anticipates the Fed will deliver two cuts before year-end 2025 and at least two more in 2026 — moves that could erode dollar strength over time.

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.