Good morning. Oil prices are back above $100 a barrel, yields are climbing, and the dollar is once again in the ascendant as Iran steps up its attacks on shipping through the Strait of Hormuz and traders keep a wary eye on a storm forming in the Gulf of Mexico. Brent futures are trading near $102 a barrel after several strikes were reported overnight and forecasters warned that the first Atlantic hurricane of 2026 could threaten offshore oil and gas facilities responsible for a significant share of US output. Ten-year Treasury yields are near 5.32%, and the trade-weighted dollar is near its highest levels since last April.
The euro is trading near a 17-month low as investors grow more worried about France’s fiscal trajectory in a world of higher-for-longer yields. The spread between French and German ten-year yields has widened again—to around 137 basis points—after narrowing yesterday when Marine Le Pen, the far-right politician seen as a frontrunner in next year’s presidential election, set out a plan to cut spending and keep government debt in check, appearing to walk back earlier pledges to reduce taxes and lower the retirement age for French workers.
France seems caught in a “doom loop”: rising yields are pushing up debt-service costs, those costs are leading to a widening in expected deficits, and wider deficits are pushing yields higher still. But counterbalancing forces should soon come into play as investors hedge against an intervention from the European Central Bank—and as politicians heed the message being delivered by markets by putting the country’s finances on a more sustainable trajectory. Sooner or later, France—like many other countries—will come to terms with an end to free money.
This afternoon will see the release of minutes taken during the Fed’s September meeting, when policymakers raised rates for the first time since 2023. They are likely to sound very hawkish, revealing that “almost all” participants saw at least one additional move this year as appropriate, while “several” expected multiple moves. But they will be stale on arrival. Fed officials turned more cautious last week after softer-than-expected inflation and jobs data, and markets are now putting the odds on a second consecutive hike this month at less than 25%.
The US trade deficit widened by more than expected in August, suggesting that tariffs, even as they have made imports more expensive, have done little to diminish America’s appetite for foreign goods. The overall imbalance jumped 13.7% to $105.6bn, the largest since March 2025—and even that was flattered by a rise in oil exports drawn from commercial stocks and the Strategic Petroleum Reserve rather than from increased production. The country ran near-record goods deficits with several trading partners, including Mexico and Canada. Part of the explanation lies in the boom in artificial intelligence investment, which is consuming chips and data-centre components at a ferocious pace; the rest reflects a broader strengthening in demand, buoyed by a growing economy, tax cuts, and a widening budget deficit. Simply put, a country that spends more than it produces must import the difference: a shortfall of more than $100bn a month must be matched, dollar for dollar, by foreign purchases of American assets.
There are historical parallels for foreign exchange markets. In the early 1980s Ronald Reagan’s tax cuts and defence build-up produced vast fiscal deficits* just as Paul Volcker’s Fed was squeezing inflation out of the economy. A mix of loose fiscal policy and tight money sent real interest rates soaring, higher yields drew in foreign capital and drove the dollar almost 77% higher in less than five years, and American exporters were priced out of world markets, widening the trade deficit further. The cycle broke only when inflation subsided and rates began to fall, with the dollar peaking in February 1985 as speculators headed for the exits. Seven months later America, Japan, West Germany, France and Britain agreed at the Plaza Hotel** to push it lower still through coordinated intervention. Even then, the trade deficit kept widening for another two years before the cheaper dollar worked its way through to trade flows.
This time is (probably) different. Although the Fed raised rates by a quarter point in September, its first increase in three years, real policy rates are still expected to remain near zero—making today’s tightening a pale imitation of Volcker’s, who routinely kept real rates above 5%. America’s balance sheet is different too. In 1981 the US was the world’s largest net creditor; today its net foreign liabilities exceed $20tn, and foreigners already hold vast quantities of American equities and Treasuries. In the 1980s, high yields lured fresh money into a market where foreigners owned relatively few American assets. Today the marginal foreign investor is already holding an over-concentrated portfolio. Persuading such investors to absorb still more requires a higher expected return—and without much higher real yields, that is more likely to mean a cheaper dollar than a more expensive one. Further, today’s marginal buyer is chasing the AI boom through equity participation rather than yield through Treasuries.
To us, that leaves the dollar unusually exposed. So long as the technology-sector boom lasts, it can both widen the deficit and finance it; but should it stumble, imports will fall, and the inflows that pay for them might fall faster. In the near term, further rate hikes from the Fed, along with the energy shock, may keep the greenback aloft. But over any horizon longer than a few months, the path of least resistance for the dollar is down.
*Reagan famously said “I’m not worried about the deficit; it’s big enough to take care of itself”.
*Although it looms large in the popular imagination***, the historical record shows the Plaza Accord was mostly a symbolic gesture, ratifying what was already happening in markets at the time—and telling investors that central banks wouldn’t stand in their way.
***The popular imagination of three or four currency nerds, that is.
****I did not mean to write a short novel this morning, my apologies.