--- title: "The Dollar Was Supposed to Weaken This Year. Instead It Hit an 18-Month High" description: "A sinking euro, 5.3% Treasury yields, foreign money chasing AI and America’s energy exports have reversed Wall Street’s consensus" author: "Nate Ledger" published: 2026-10-05T23:56:36.812Z modified: 2026-10-06T02:20:21Z url: https://rews.cc/a/the-dollar-was-supposed-to-weaken-this-year-instead-it-hit-a-ad751f language: en tags: ["dollar", "euro", "inflation", "ai", "energy", "business", "finance"] publisher: "Rews (https://rews.cc)" --- # The Dollar Was Supposed to Weaken This Year. Instead It Hit an 18-Month High *A sinking euro, 5.3% Treasury yields, foreign money chasing AI and America’s energy exports have reversed Wall Street’s consensus* By Nate Ledger · October 5, 2026 · https://rews.cc/a/the-dollar-was-supposed-to-weaken-this-year-instead-it-hit-a-ad751f ## In brief - The dollar index is up about 4% this year, reaching its highest level since April 2025 - The euro fell to $1.116 on October 5, a 17-month low, amid French fiscal worries and a snap election in Spain - The US 10-year Treasury yield reached 5.31%, drawing foreign buyers who need dollars - Foreigners bought about $450bn of US corporate bonds and about $900bn of stocks and funds in the 12 months to July - Strategists at Crédit Agricole, Morgan Stanley and BlackRock warn the rally may be overdone At the end of last year, the standard Wall Street view on the dollar was that it would go down. The reasoning was simple: the US runs enormous budget deficits, and the dollar’s standing as the place you hide when things go wrong looked shakier than it used to. Lots of forecasts called for further declines. Instead, the dollar index (DXY), which measures the dollar against a basket of major developed-market currencies, is up about 4% this year and has reached its highest level since April 2025, according to the Chosun Ilbo. The Bloomberg dollar spot index has risen for three weeks in a row and is close to its high for the year. The Chosun Ilbo counts five reasons. What I like about the list is that some of the items were supposed to be reasons for the dollar to fall. ## Mostly, it’s the euro Start with a quirk of the measuring stick. The dollar index isn’t the dollar against the world. It’s the dollar against a handful of currencies, and the euro makes up 57.6% of it. So when the euro falls, the index rises more or less automatically, whatever is happening in America. On Monday, October 5, the euro fell as low as $1.116 during trading, a 17-month low. In January it was around $1.20, so it has lost about 7%. The index touched 102.53 that day, its highest since April 10, 2025, just after the “Liberation Day” tariff announcement, and the euro’s slide accounted for about three-quarters of that climb, according to [a market report carried by Yahoo Finance](https://finance.yahoo.com/markets/currencies/articles/asian-currencies-mixed-dollar-holds-042956123.html). Some of what gets called “king dollar” is really the euro losing ground. The euro’s problem is France. Citing the Guardian, the Chosun Ilbo reports that French 10-year government bond yields have climbed close to 5%, their highest since 2002. Reuters reported that the gap between French and German 10-year yields widened to [nearly 160 basis points](https://www.investing.com/news/economy-news/dollar-holds-firm-as-french-fiscal-woes-keep-euro-on-back-foot-4930983) on Friday, the widest since the euro zone’s sovereign debt crisis in 2011. Spain has also announced a snap election, which adds to the political uncertainty across the euro zone. The money leaving the euro has to go somewhere, and as The Economist put it, “investors selling euros don’t have many places to go, and the dollar is one of the clearest options.” ## Deficits, but make them attractive The second reason is interest rates. The US 10-year Treasury yield recently reached 5.31%, its highest in years. A foreign investor can now earn more than 5% a year just by holding US government debt. To buy that debt, you first need dollars, so demand for Treasuries is also demand for the currency. This is where the deficit argument flips. The worry was that endless government borrowing would erode faith in the dollar. But borrowing that much means selling that many bonds, and selling them means paying yields high enough to find buyers. Many of those buyers are abroad and have to buy dollars first. At some yield the deficit stops pushing foreign money away and starts pulling it in. Whether that’s a healthy arrangement is a separate question. The government isn’t the only borrower. Big tech companies are raising tens of billions of dollars at a time for data centers, power grids and chip infrastructure, and foreigners are buying the bonds. Marketplace reported that US companies are “borrowing heavily to build AI infrastructure, and overseas investors are buying those bonds.” Joe Gagnon of the Peterson Institute for International Economics said there is “a great deal of borrowing going on in the US to finance data center construction, and foreigners are investing in it.” In a [February paper](https://www.piie.com/sites/default/files/2026-02/wp26-2.pdf), Gagnon and Tamim Bayoumi sketched an “AI boom” scenario in which the dollar rises, and an “AI bust” scenario in which it doesn’t. So far it’s the boom. According to The Economist, foreigners made net purchases of about $450 billion of US corporate bonds in the 12 months to July, the most in roughly 20 years even after adjusting for inflation. Purchases of US stocks and investment funds were bigger still: about $900 billion over the same period, a 12-month record and 80% above the previous peak in 2021. That puts the 2021 peak at roughly $500 billion. Axios, citing Bureau of Economic Analysis data, reported that foreigners bought a [record $426 billion](https://www.axios.com/2026/09/25/foreign-investment-stocks-dollar) of stocks and fund shares in the second quarter alone. They’re buying into a growing economy. The Economist reports that economists expected annualized US growth of 1.6% to 1.9% a quarter this year. Actual growth was 2.5% in the first quarter and 2.2% in the second, and the third is expected to come in around 2.5%. On October 5, gains in Nvidia, Meta, Microsoft and other big tech stocks pushed the Nasdaq to a record, with the 10-year yield at 5.3%. Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management, told Reuters that stocks were fairly calm while the bond market was in a “perfect storm” because economic growth is accelerating and the AI boom is relatively insensitive to rising rates. ## Oil, flipped The fifth reason is the oddest. The US used to import a lot of oil, so expensive oil meant sending more dollars abroad, which weakened the currency. The shale revolution made the US a net energy exporter, which reverses the effect. The Economist says higher energy prices caused by the Iran war help explain the dollar’s current strength. Expensive fuel hurts American consumers, but it now brings foreign money into the US instead of sending it out. Sure. Now the warnings. Valentin Marinov, head of G10 FX strategy at Crédit Agricole, said the dollar “is currently overbought and also overvalued,” and that it could become vulnerable if this week’s US economic data come in weaker than expected. Morgan Stanley’s currency strategy team, led by David Adams, warned that if a dollar-negative risk premium suddenly widened, long dollar positions could be stopped out en masse, and said it prefers buying dips to buying the dollar at current levels. The BlackRock Investment Institute said the room for a sustained dollar bull market is limited. So the forecast is now that the dollar will weaken. That was the forecast last December too. The only change is that it now starts from a higher level.