By Amanda Cooper and Chibuike Oguh
NEW YORK/LONDON, Oct 1 (Reuters) - The dollar rose to a 17-month high against the euro on Thursday amid a selloff in government bonds across the US and Europe, which pushed Treasury yields to fresh peaks as higher oil prices fanned inflation.
The European currency fell below $1.123 for the first time since May 2025 against the dollar, which has been in ascendancy for the past couple of months, thanks in part to the largest quarterly rise in Treasury yields since 1994.
The euro was last down 0.79% at $1.1238. It declined nearly 2.5% in September, its largest monthly decline since July 2025.
"Higher yields have been driven by a confluence of factors in particular concern about fiscal policy including some weakness in French bond markets, which may be spilling over into global markets, as well as continued concern around energy prices and higher inflation," said Brian Daingerfield, head of G10 FX strategy at NatWest Markets.
"There's market expectations for continued tightening from central banks, which includes the Federal Reserve. We've seen a bit of pull back over the last few days specifically after some of the PCE numbers we got yesterday. But I think the broad view is that additional Fed tightening is likely coming."
The yield on benchmark US 10-year notes hit its highest level since 2002 on the day. It was last down 2.28 basis points to 5.272%.
The euro also sank against the yen and the Swiss franc, and barely held in positive territory against the pound, as yields on French debt, which have been hounded by worries about France's shaky finances, surged to another 14-year high. Benchmark German debt also came under fire.
Data on Wednesday showed US inflation rose less than expected in August, along with downward revisions to July's figure, which lowered expectations for a Federal Reserve rate hike this month. But a surge in euro zone inflation underscored the threat that higher energy prices continue to pose to the global economy.
The dollar clocked its sixth straight quarter of gains against a basket of currencies by the end of September, its longest such stretch since 2022 when US rates were rising more quickly than those elsewhere. The dollar index was last up 0.57% on the day, after hitting its highest level since April 2025.
Global bonds suffered their largest monthly decline in years in September, pushing yields higher, due to a toxic mix of deteriorating government finances, a glut of issuance and rising inflation.
Sterling was down 0.54% at $1.31924 after having slid 2.1% last month, but was steady against the euro, which traded at its weakest point since late June against the pound, around 85.11 pence.
The Japanese yen weakened 0.11% against the greenback to 157.6 per dollar. The Australian dollar fell to a two-month low of $0.69040 after domestic inflation came in below forecasts.
(Reporting by Chibuike Oguh in New York; Editing by Nia Williams)
