The U.S. dollar rose nearly 2.5% against the euro in September, marking its largest monthly advance in 14 months.

The euro fell to as low as $1.1312 on Monday, its weakest level since May 2025, and was last trading near $1.1334.

The core driver behind this dollar rally is not a single safe-haven trade, but rather relatively stronger U.S. growth and rate expectations.

Europe, meanwhile, is simultaneously weighed down by energy prices, French fiscal and political uncertainty, with interest rate differentials once again becoming the main thread in currency pricing.

The dollar's strength has also spread to other currencies.

The Swiss franc fell to a 16-and-a-half-month low against the dollar, while the Australian dollar dropped below $0.70 for the first time since early August.

The most direct catalyst for the stronger dollar is the resilience of the U.S. economy, alongside markets once again raising their expectations for the Federal Reserve's rate hike path.

Higher rates increase the yield appeal of dollar-denominated assets.

As long as U.S. short-end and long-end rates remain significantly above those in Europe, global capital has more incentive to hold dollar bonds and cash assets.

Europe, by contrast, faces higher energy costs.

Benchmark European natural gas prices rose to their highest level since 2022 at one point this month, with energy once again becoming a key variable in economic and inflation pricing.

Pressure in the French bond market is also mounting.

The yield spread between French and German government bonds broke above 115 basis points, the widest level since 2012, further eroding the relative appeal of euro-denominated assets.

While the dollar remains strong, the Federal Reserve is not unanimously in favor of rapid, consecutive rate hikes.

New York Fed President Williams said that after the September hike, there is "no need to rush" into another move.

Following those remarks, the U.S. two-year Treasury yield fell by about 3.5 basis points on Tuesday, and federal funds futures showed the market's probability of another rate hike next month dropping from about 71% to 50%.

This has placed a certain ceiling on the dollar's advance.

If U.S. data begins to weaken and markets continue to lower the odds of an October hike, the room for further widening of the U.S.-Europe rate differential would diminish.

However, the euro's own pressures remain, so even if the dollar loses some rate-driven momentum, it may not necessarily reverse immediately.

The current exchange rate is more a result of the combined effect of America's rate advantage and Europe's own fundamentals.

The core PCE inflation gauge favored by the Federal Reserve will be released on Wednesday, followed by the U.S. nonfarm payrolls report on Friday.

If employment data remains strong, markets may once again raise rate hike expectations.

For the dollar, the next leg higher requires confirmation from new data.

Spectra Markets President Brent Donnelly also said that for the dollar to move further up from current levels, strong U.S. data will need to continue providing momentum.

The dollar's nearly 2.5% gain against the euro in September has already reflected a great deal of America's rate advantage.

If PCE and nonfarm payrolls remain firm, the dollar could retest this cycle's highs; if the data cools, month-end carry trades may first enter a period of consolidation.