Euro Extends Losses as Hawkish Fed Signals Boost Dollar

The euro extended its decline below $1.14, touching a fresh near two-month low as the dollar strengthened following stronger-than-expected US PMI data and a series of hawkish remarks from Federal Reserve policymakers, reinforcing expectations of further monetary tightening. A rebound in oil prices, amid persistent uncertainty surrounding US-Iran talks, also weighed on risk-sensitive assets. Meanwhile, investors digested stronger-than-expected PMI data showing that eurozone private-sector activity expanded in September at its fastest pace in almost three-and-a-half years, strengthening expectations that the ECB could raise interest rates further this year. ECB official Joachim Nagel said Tuesday that oil prices were becoming an increasingly important factor in monetary-policy decisions and left the door open to further rate hikes. Chief Economist Philip Lane, meanwhile, warned that another surge in energy prices could keep eurozone inflation elevated for longer than expected.

The euro weakened toward $1.14, touching its lowest level since July 29, as falling oil prices prompted traders to scale back expectations for further ECB rate hikes, while the US dollar remained supported by expectations of additional Federal Reserve tightening. Brent crude fell below $100 a barrel amid signs of progress in US-Iran talks and continued efforts to restore operations at a key Saudi Arabian pipeline.ECB official Joachim Nagel said oil prices were becoming an increasingly important factor for policymakers and left the door open to further hikes, citing still-high core inflation but saying he saw no significant second-round effects so far. ECB Chief Economist Philip Lane, however, warned that another surge in energy prices could keep eurozone inflation elevated for longer than previously expected. Meanwhile, stronger-than-expected flash PMI data showed eurozone private-sector activity expanding in September at its fastest pace in almost three-and-a-half years.

The euro weakened to $1.145, its lowest level since late July, as investors assessed developments in the Middle East while the USD remained supported by expectations of further Federal Reserve rate hikes. Brent crude resumed its decline after reports that Iran had offered to reopen the Strait of Hormuz within seven days if Washington lifts its military blockade of Iranian ports. Meanwhile, ECB’s Chief Economist Philip Lane warned that a new wave of higher energy prices could keep Eurozone inflation elevated for longer than policymakers initially anticipated. He said the shock should result in higher and more persistent inflation before a decline toward the ECB’s target from mid-2027. Following this month’s second rate hike since the Iran war sent energy costs soaring, ECB officials have begun laying the groundwork for further tightening. Eurozone inflation is expected to reach around 4% in coming months, with the ECB projecting 3% this year and 2.5% next year, well above its 2% target.