The dollar held near its highest level this year against the euro on Wednesday and was on track for its biggest monthly gain against the single currency in 14 months, supported by strong U.S. economic growth and rising interest rate expectations.

In trading, the euro rose slightly to $1.135, but remained close to its lowest level since May 2025, which it reached in the previous session. It also tested a support level near 178 yen.

The euro was among the worst-performing G10 currencies this year, weighed down by European concerns about energy and debt. The dollar rose about 2.3% against the euro in September, putting it on track for its third consecutive quarterly gain.

A series of data showing the resilience of the US economy and persistent inflation prompted the Federal Reserve to raise interest rates earlier this month for the first time in three years. Following this, markets began pricing in a more hawkish path for US monetary policy compared to the Eurozone, where growth remains weak and debt concerns are mounting.

Some bets on a Federal Reserve tightening monetary policy also eased on Wednesday, after New York Fed President John Williams said there was no need to rush in raising interest rates, while French data showed consumer price inflation accelerated more than expected in September.

The main drivers for the euro are the monetary policy expectations of both the Federal Reserve and the European Central Bank. Comments made earlier this week by ECB President Christine Lagarde were interpreted as a rejection of the possibility of successive interest rate hikes.

The options markets in recent sessions also reflected increased demand for hedging instruments against further euro weakness.

Economic data in the spotlight

Investors are awaiting economic data from both sides of the Atlantic, including German inflation data for September, along with the Federal Reserve's preferred inflation measure, the Personal Consumption Expenditures Price Index, for August.

Traders have lowered their expectations for a 25-basis-point Federal Reserve interest rate hike next month to around 44%, down from about 70% earlier this week, according to the CME Group's FedWatch tool. Markets also expect the European Central Bank to leave interest rates unchanged in October, according to LSEG data.

The dollar has risen against most major currencies this month, supported by U.S. Treasury yields climbing to multi-year highs.

As for the yen, it has become less attractive as a funding currency after Japan’s intervention to buy yen in July, repeated warnings from Japanese authorities about excessive currency movements, and the accelerating pace of raising domestic interest rates.

The dollar fell 1.7% against the yen in September, and by about 3.4% during the third quarter.