Newsletter · 2026-10-06 · Ashutosh Agarwal

Europe's Troubles Become the Dollar's Tailwind as the Euro Hits a 17-Month Low - The Dollar Brief - Week of October 6, 2026

The Dollar Brief for the week of October 6, 2026 (podcasts published October 1 to 6): the euro fell to a 17-month low as French 10-year bonds hit 4.86% against 3.45% for Germany, Bank of America says dollar positioning is rebuilding but not stretched, a Bloomberg strategist targets euro at 1.10, and the 10-year Treasury yield closed at 5.31%.

The Dollar Brief

Week of October 6, 2026: Europe's Troubles Become the Dollar's Tailwind as the Euro Hits a 17-Month Low

For most of September, the dollar story was about America. Hot growth, sticky inflation, a Fed that started raising rates again.

This week, the story moved across the Atlantic.

On Monday morning, the euro fell to a 17-month low against the dollar, its weakest level since May 2025. France's budget mess was already weighing on it. Then Spain's prime minister called a surprise "institutional declaration" amid talk of a snap election. CNBC's Karen Tso put it neatly on Squawk Box Europe Express: "The bond market angst has now become an FX story as well."

That matters more than it sounds. The dollar index is roughly 60% euro. So when Europe wobbles, the dollar rises almost automatically, even when the US has a soft jobs report, as it did on Friday.

The interesting question this week: how much of the dollar's rally is about American strength, and how much is just Europe's weakness? The answer changes what could stop it.

(Quick glossary. The "dollar index," or DXY, measures the dollar against six major currencies. A "yield" is the interest rate on a bond; it rises when the bond's price falls. A "basis point" is one-hundredth of a percentage point. A "real" yield is the interest rate after subtracting expected inflation. A "spread" is the gap between two yields; the France-Germany spread measures how much extra France has to pay to borrow compared with Germany. "Duration" is a measure of how sensitive a bond is to interest-rate moves; "owning duration" means betting rates will fall.)

TL;DR

The euro hit a 17-month low on Monday. It slid from about 1.15–1.16 to below 1.12, with French 10-year bonds at 4.86% against 3.45% for Germany. Spain's political drama added fresh pressure (Squawk Box Europe Express, Oct 5).
The dollar index is at its highest since April of last year. Tim Seymour on Fast Money said the dollar "was meandering for almost 12 months and now has broken higher over the last... two weeks" (Oct 5).
Bank of America says dollar optimism is not overdone yet. Futures positioning swung from "multi-year longs in July to slightly short just a few weeks ago," and is now rebuilding. The dollar is moving in step with interest-rate gaps, not running ahead of them (Global Research Unlocked, Oct 5).
A Bloomberg strategist's call: short the euro, target 1.10. Relayed on The Wolf Of All Streets (Oct 5).
The 10-year Treasury yield closed Monday at 5.31%, a new 24-year high, per Marketplace (Oct 5). Real yields are doing the work: Axel Merk puts the 10-year real yield at 2.95%, "pretty darn high" (ITM Trading Podcast, Oct 5).
A split on the Fed's next move. A veteran money-market fund manager at Federated Hermes still expects a hike this month (The Treasury Update Podcast, Oct 5). JPMorgan Asset Management's Priya Misra says October "looks a little hard" and the bond selloff is "a bit overdone" (ETF Edge, Oct 5).
Harley Bassman calls the bond selloff "a 95% fiscal problem" and thinks the long-run escape valve is a weaker dollar (Alpha Exchange, Oct 6).

What's new

Europe takes over the worry

The CNBC Europe team listed the problems on Squawk Box Europe Express Monday morning. It's a long list:

France: a budget fight ahead of next year's presidential election. French 10-year paper at 4.86% against German bunds at 3.45%. The French stock market fell 2.2% last week.
Spain: two flagship housing bills defeated in parliament, then Prime Minister Pedro Sánchez scheduling a special announcement amid snap-election talk. Spanish 10-year bonds sat at 4.09%.
Germany: a weak chancellor and gains for more extreme parties.
Energy: low gas storage heading into winter, high energy prices, and pressure to release diesel stockpiles.
Competition: "Competition from China, the Europeans are not winning."

Tso's summary: "We've spent the last number of weeks very closely watching the data out of the US, very closely watching the US Treasury market. But now the fears seem to have all moved over to this side of the world."

Steve Sedgwick offered the calmer view. These debt and deficit worries are not new, he argued, so the market may simply "move on." But he named three things investors clearly dislike right now: inflation, deficits, and "an awful lot of debt issuance to choose from."

Why the dollar gets the lift

On Monday night's Fast Money, Tim Seymour broke it down.

First, the US side. A strong services report (the ISM services index) showed the economy "clicking along," and "the Warsh Fed is very focused on inflation." Whether the next hike comes "in October or December or once or three times," he said, that uncertainty "is a lot to do with the rally in the dollar."

Second, Europe. "Remember, the Dixie or the dollar basket is about 60 percent euro. The rest is heavy yen." Add pressure at the Bank of Japan, and "all this tells us the dollar could go higher."

His warning: "First, higher rates. Now, higher dollar. At some point, that bites equities."

Joe Gagnon of the Peterson Institute gave the plain-English version on Marketplace. Two forces are pushing the dollar up. Government debt pushes US interest rates higher, and "higher U.S. interest rates attract foreign savers." And AI spending: "There's just a lot of borrowing to finance data centers in the United States, and foreigners are investing in them." Both mean more foreigners buying dollars.

A second Marketplace segment drew out the side effect. A strong dollar makes imports cheap and exports expensive, which widens the trade deficit. In other words, the government's own borrowing is part of why the trade gap President Trump dislikes keeps growing. Scott Lincicome of the Cato Institute: if policymakers really care about the trade deficit, "the number one thing they could do isn't enact a bunch of tariffs or trade agreements. It's balance the budget."

Bank of America: optimism is building, but it isn't excessive

This was the most useful positioning read of the week. Alex Toubia, an FX strategist at Bank of America, spoke on the bank's Global Research Unlocked podcast right after Friday's jobs report.

His points:

The jobs miss barely dented the dollar. The move was "less than a quarter percent, plus or minus" against most major currencies, "and in many places, you know, the knee jerk move got faded."
The rally isn't just about oil. The dollar has been "in nonstop rally mode since really since the September FOMC," during a stretch when oil was "actually... a bit lower."
Positioning has swung hard. In the futures market, bets went "from very long, almost, you know, multi-year longs in July to slightly short just a few weeks ago and then rebounded last week." He expects those bets to grow.
But it isn't a frenzy yet. His test: sentiment gets dangerously strong "when the dollar's outpacing the move in rate differentials." That last happened "right after the war started." Today, "the dollar has really been tracking rate differentials pretty tightly."
The real catalyst is CPI on October 14. "If we get a hot report, I think today's labor report would, you know, quickly fade from our consciousness."

Why this matters: a crowded bet can reverse violently. Toubia's read is that the dollar rally still rests on real interest-rate gaps, not on hype. That makes it sturdier, and it puts the October 14 inflation report at the center of the story.

A Bloomberg call to short the euro

On The Wolf Of All Streets Monday, a Bloomberg Intelligence strategist walked through his team's morning meeting. Two currency notes stood out:

Their FX strategist, Audrey Childe-Freeman, expects the euro "to head towards that one key 110 level, psychological level." Given the direction of things in France, "it's best to be defensive. And FX means short the Euro."
Their rates strategist noted that once you account for currency-hedging costs, US Treasuries are "near amongst the lowest yielding among the G10 or G7 countries." That's a quiet but real point. Foreign buyers who hedge their currency risk don't get the eye-catching 5.3% yield.

Macro analyst Michael Howell, on the same episode, pushed back on the idea that rising yields mean the world is losing faith in the dollar. "There's a lot of narrative out there that says the bond yields are rising because of debt concerns, because of disillusionment with the dollar," he said. His view: "we're living in a collateral-based world." With "eighty percent of all lending worldwide now... collateral-based," bond-market volatility matters more for credit than the Fed's rate. He also argued that China, not Western central banks, is what's driving gold: "China is pricing the gold bullion market at the margin," because "China is suffering debt deflation."

Real yields are doing the heavy lifting

Here's a detail that matters for the dollar. The jump in US yields is mostly real yields, not inflation fears. Higher real yields are what attract foreign money.

Priya Misra of JPMorgan Asset Management on ETF Edge: "This rise in rates has all been a real rate, real rate led move, not inflation."
Axel Merk of Merk Investments on the ITM Trading Podcast: "If you look at real interest rates further out at 10-year, we're at 295 in real rates. That's pretty darn high." He treats that as a "confidence indicator" of how the market expects the Fed to act.
Harley Bassman on Alpha Exchange: the market's implied inflation rate is about 2.35%, and "it hasn't punched in four years." His wry theory for why real yields are rising instead: maybe investors think "CPI is cooked" and understates true inflation.

Merk added an interesting aside. He recently met Fed Chair Kevin Warsh, and says they "did not discuss gold," despite what gold enthusiasts hoped. His read on Warsh: "a hawk at heart," but one who "doesn't like to use a sledgehammer." Merk had expected a December hike, not October, and was "actually baffled that the market priced in a huge rate hike in October."

Bassman: a fiscal problem with a currency ending

Bassman, the veteran bond-options trader known as "the Convexity Maven," gave the most sweeping take of the week on Alpha Exchange (Oct 6).

On why long-term yields are rising: "It is a 95% fiscal problem. We got $5 trillion of income and $7 trillion of expenses. Interest is now, what, $1.1, $1.2 trillion." Once all the old low-rate debt rolls over at 5%, "we're talking $2 trillion in just interest."

On AI borrowing: hyperscaler debt issuance is about $750 billion, "like a third of what the government's borrowing." These companies "are totally rate insensitive," and "any entity that buys a hyperscaler bond is not buying a treasury bond. So that pushes the entire complex up in rate."

On Treasury Secretary Scott Bessent's bond buybacks: "These aren't plans. They're like, I don't know, short-term coin flips."

And on the dollar, the long-run view: "I'm not sure how we get out of this thing easily without debasing the currency." He pointed to Japan, where the yen went from 80 to 160 per dollar: "That's the escape valve. The US dollar will go down the same path, I suppose, at some point. I'm not sure versus what."

He's careful on timing, though. "It could take 20 years for this to happen. Don't go short getting on the market yet."

Krishna Guha on why yields jumped

On The Real Eisman Playbook, Krishna Guha walked Steve Eisman through the move in the 10-year from "something like 4.5%" in July to about 5.25%. He called it "the classic perfect storm":

Crowding out, in reverse. AI hyperscalers are issuing "a ton of debt" on top of a government deficit of 6% of GDP. As Eisman put it, "the private sector is crowding out the government."
A higher "normal" rate. Investors see "a multi-year AI investment boom" and conclude we've moved "from a world where there was too much saving chasing too few investment opportunities" to the reverse.
Oil and especially diesel. Diesel's move is "more like if oil was closer to 200 bucks."
Fed uncertainty. Warsh "hates this thing called forward guidance," so investors don't know how far he'll go.

On Bessent's buyback plan, Guha was blunt: in a "$40 trillion market," a few billion here and there means "you've absolutely brought a knife to a gunfight." He also expects Warsh to shrink the Fed's roughly $6.5–7 trillion balance sheet eventually, but to wait for "a window of opportunity when bond market conditions stabilize."

The October hike debate isn't settled

Markets have mostly priced out a hike at the October 28 meeting. Not everyone agrees.

For an October hike: Sue Mazzero, head of government liquidity at Federated Hermes and a 36-year veteran of the firm, said on The Treasury Update Podcast: "I do think another 25 basis points is likely in October. And then we have another one probably penciled in for early next year." Her reasoning: Warsh described the last hike as removing "a dose of accommodation," which implies policy is still loose. "The Fed, I think, almost has never tightened only once."

She also flagged changes coming from Warsh's five task forces, due to report by the end of December. On the table: changes to the quarterly "dot plot" of rate forecasts (Warsh has "declined to submit his own dot at the last two"), possibly fewer meetings, and plans to shrink the balance sheet.

Against: Priya Misra on ETF Edge: "We haven't had data that should justify an October hike, but maybe one in December and perhaps one more early on in the year." Fed officials talk of "one or two more rate hikes," while "the market's pricing in three." She thinks the last 25–30 basis points of the bond selloff came from forced selling and hedging, not new information, and she has started adding duration.

For the dollar, this is the key tension. If Mazzero is right, rate gaps widen further and the dollar likely keeps climbing. If Misra is right, the rate story is fully priced and the dollar loses one of its supports.

The Debate: Does the Dollar Keep Climbing?

The case for more upside.

The rally is backed by real rate gaps, not hype (Toubia, BofA).
Europe's problems are piling up, and the euro is 60% of the dollar index (Seymour, Fast Money).
A Bloomberg team is targeting euro at 1.10.
AI borrowing and deficits keep pulling foreign money into US assets (Gagnon, Marketplace).

The case for a turn.

Washington doesn't want it. Guy Adami on Fast Money: "Treasury cannot be happy about this. Because when you have a $40 trillion debt problem, the last thing you want is your currency to strengthen." With rates also rising, "it's a double whammy for them... So at some point, something will get done."
The rate move may be overdone (Misra). If yields ease, the dollar loses support.
The spring view. Chris Vickio of tastylive told Marketplace he expects the dollar to weaken by spring as AI investment and the Middle East war calm down. That "wouldn't be a bad thing," because lower rates and a weaker dollar "would provide a lot of stress relief here domestically."
The very long view is Bassman's debasement argument, though he puts the timeline at years, not months.

Karen Finerman raised a puzzle on Fast Money that neither side fully answered. If France sparks a flight to safety, why aren't investors buying long-term Treasuries? Her guess: the safe-haven money is going to the dollar and to short-term US debt, not long bonds. Seymour's answer: "I'm not sure anyone anywhere wants to own the long end of the curve."

A Provocative Theory: Is Washington Steering Money Out of Europe?

Flagging this as speculation from a commentator, not reporting.

On The Jack Mallers Show (Oct 6), the Strike CEO built a theory around this summer's US intervention to support the yen. His account: the Treasury's Exchange Stabilization Fund sold euros to buy $5–10 billion of yen, "the first time that the U.S. has bought yen to support Japan's currency since 1998." (Chris Mandeville on Street Signals (Oct 1) separately referred to a "joint intervention in July.")

Mallers argues the choice of euros was deliberate: Bessent is telling Japan, in effect, "don't sell our treasuries... Instead, dump Europe." He points to three signs: the euro "down 4% against the Japanese yen" since then, the France-Germany spread at 135 basis points, and France's largest bank's stock down 10%. He notes that around 60% of French government debt is owned by foreigners, which makes it the first thing sold when they need cash.

To his credit, he admits the gap in the evidence: "I'm never going to be able to prove all of this, but you can't call me crazy." Treat it as a framework to test, not a fact.

The Midterm Angle

The November 3 elections are four weeks out. J.T. Taylor, Hedgeye's chief political strategist, laid out the numbers on Hedgeye Podcasts: Republicans hold a House majority of about three seats, and "the Democrats need to win four seats to take the House." The number of competitive races has grown from "about 25 to 35" to "probably 35 to 50."

He sees parallels to 2006: "in the middle of a war, high gas prices, inflation." What moved the polls toward Democrats over two weeks, in his view, "was the inflation numbers. It was the interest rate hike that Warsh just unveiled," plus a trade fight with Canada.

Why this matters for the dollar: several bond investors have argued that a divided government would mean less new spending, which could take some pressure off long-term yields and therefore off one of the dollar's supports.

Read-Throughs

US stocks: The dollar and yields are rising together, and the Fast Money panel's flight-to-safety trade is big tech. Seymour: since September 15, when 10-year yields rose "35 to 40 basis points," the Nasdaq 100 has beaten the S&P 500 "by almost 6 percent."
Gold: Higher real yields and a strong dollar are a headwind. Merk says central banks remain "incentivized to diversify" away from the dollar, but speculators who piled in this spring have backed off.
Credit: Misra sees triple-C spreads "almost a thousand over," a recession-like level, while higher-quality junk bonds look tight. Joanna Gallegos of BondBlocks puts BBB yields at about 6.2%, BB at 7%, and single-B at 8%.
Emerging markets: Popular carry trades are unwinding. On Street Signals (Oct 1), Chris Mandeville noted the dollar is about 6% higher against the Mexican peso and nearly 10% off its lows against the Colombian peso, with the Mexico-US rate gap down to about 250 basis points.

What Changed

The dollar's driver shifted. Last week, the push came mostly from US rates. This week, Europe's political and fiscal stress did more of the work.
The "is it overdone?" question got a data-based answer. Bank of America says positioning is rebuilding but not stretched, because the dollar is still tracking rate gaps.
A real disagreement opened on October. A senior money-market manager still expects a hike this month; most of the market doesn't.

The Week Ahead

Wednesday: FOMC minutes, which will show how hawkish officials were before the soft data. Also the 10-year Treasury auction, with the 30-year to follow. Marketplace notes recent 2-, 5- and 7-year auctions "did not go particularly well."
October 14: September CPI. Bank of America calls this the number the dollar will react to most.
October 28: FOMC meeting.
November 3: Midterm elections.