Forex
Election concerns in France give euro worst week in two months
By Karen Brettell
(Reuters) -The euro was on track for its biggest weekly fall against the dollar in two months on Friday on concerns that a new government will worsen France’s fiscal situation as a snap parliamentary election approaches.
The yen hit a six-week low against the dollar, before rebounding, after the Bank of Japan (BOJ) surprised markets with a dovish monetary policy update.
French markets saw the biggest weekly jump since 2011 in the premium that investors demand to hold French government debt and bank stocks tumbled on Friday.
The concern is “the instability combined with the already existing pressure on the budget,” said Brad Bechtel, global head of FX at Jefferies in New York, adding that “any time spreads widen in Europe, the euro suffers.”
French Finance Minister Bruno Le Maire said on Friday that the euro zone’s second-biggest economy was at risk of a financial crisis if either the far right or left won because of their heavy spending plans.
Marine Le Pen’s eurosceptic National Rally (RN) is leading in opinion polls.
“On both ends of the French political spectrum, the parties that are campaigning are fiscally expansionist parties,” said Karl Schamotta, chief market strategist at Corpay in Toronto. “Markets are mostly responding to additional fiscal stress.”
The euro is on track for a 0.95% weekly fall – its biggest since April – and was last down 0.34% on the day at $1.0699. It got as low as $1.06678, the lowest since May 1.
The euro’s weakness has helped drive the dollar higher. The – which tracks the currency against six peers – was up 0.3% at 105.55 and reached 105.80, the highest since May 2.
“We’re seeing flows into the U.S. on both ends of the spectrum – from the safe-haven side as well as on the yield-seeking side – given that U.S. yields remain well above those available elsewhere,” said Schamotta.
The European Central Bank and Bank of Canada have begun cutting rates while the Federal Reserve holds steady.
The U.S. central bank adopted a more hawkish than expected tone at this week’s meeting when Fed officials projected only one rate cut this year and pushed out the start of rate cuts to perhaps as late as December.
But for now, “the Fed is sort of taking a backseat when it comes to the dollar,” Bechtel said. Elections in emerging markets and Europe are instead driving moves, he said.
A survey on Friday showed that U.S. consumer sentiment deteriorated in June as households worried about inflation and incomes.
Other data showed that U.S. import prices unexpectedly fell in May amid lower prices for energy products, providing another boost to the domestic inflation outlook.
Softer than expected consumer and producer price inflation for May this week has helped bolster hopes that inflation will continue to ease closer to the Fed’s 2% annual target and make an interest rate cut possible as soon as September.
Chicago Fed President Austan Goolsbee on Friday said he felt “relief” after the consumer inflation data, but added there needs to be more progress.
The yen fell after the BOJ’s decision to hold interest rates and restart bond buying.
In a surprise for markets, the BOJ said it would continue to buy government bonds at the current pace for now and lay out details of its tapering plan at its July policy meeting.
BOJ governor Kazuo Ueda said the central bank was “paying close attention” to the impact of the weak yen on inflation, and added that a rate hike in July was a possibility, depending on economic data.
The dollar was last up 0.17% at 157.29 , after earlier reaching 158.26, the highest since April 29.
The yen’s decline to a 34-year low of 160.245 per dollar at the end of April triggered several rounds of official Japanese intervention totaling 9.79 trillion yen ($62 billion).
In cryptocurrencies, bitcoin fell 1.84% to $65,453.
Investing.com – The US dollar rose in thin holiday-impacted trade Tuesday, retaining recent strength as traders prepared for fewer Federal Reserve rate cuts in 2025.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 107.905, near the recently hit two-year high.
Dollar remains in demand
The dollar has been in demand since the Federal Reserve outlined a hawkish outlook for its interest rates after its last policy meeting of the year last week, projecting just two 25 bp rate cuts in 2025.
In fact, markets are now pricing in just about 35 basis points of easing for 2025, which has in turn sent US Treasury yields surging, boosting the dollar.
The two-year Treasury yield last stood at 4.34%, while the benchmark 10-year yield steadied near a seven-month high at 4.59%.
“We think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year,” said analysts at ING,in a note.
Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.
Euro near to two-year low
In Europe, fell 0.1% to 1.0396, near a two-year low, with the set to cut interest rates more rapidly than its US rival as the eurozone struggles to record any growth.
The ECB lowered its key rate earlier this month for the fourth time this year, and President Christine Lagarde said earlier this week that the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.
“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” Lagarde said in a speech in Vilnius.
Inflation in the eurozone was 2.3% last month and the ECB expects it to settle at its 2% target next year.
traded largely flat at 1.2531, with sterling showing signs of weakness after data showed that Britain’s economy failed to grow in the third quarter, and with Bank of England policymakers voting 6-3 to keep interest rates on hold last week, a more dovish split than expected.
Bank of Japan stance in focus
In Asia, fell 0.1% to 157.03, after rising as high as 158 yen in recent sessions, after the signaled that it will take its time to consider more interest rate hikes.
edged 0.1% higher to 7.3021, remaining close to a one-year high as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
Investing.com– Most Asian currencies moved in a tight range on Tuesday, while the dollar extended overnight gains as traders positioned for a slower pace of interest rate cuts in the coming year.
Trading volumes were muted before the Christmas break, while most regional currencies were nursing steep losses against the greenback for the year.
Asian currencies weakened sharply last week after the Federal Reserve effectively halved its outlook for rate cuts in 2025, citing concerns over sticky U.S. inflation.
Dollar near 2-year high on hawkish rate outlook
The and both rose about 0.1% in Asian trade, extending overnight gains and coming back in sight of a two-year high hit last week.
While the greenback did see some weakness after data read lower than expected for November, this was largely offset by traders dialing back expectations for interest rate cuts in 2025.
The Fed signaled only two rate cuts in the coming year, less than prior forecasts of four.
Higher U.S. rates diminish the appeal of risk-driven Asian markets, limiting the amount of capital flowing into the region and pressuring regional markets.
Asia FX pressured by sticky US rate outlook
Most Asian currencies weakened in recent sessions on the prospect of slower rate cuts in the U.S., while uncertainty over local monetary policy and slowing economic growth also weighed.
The Japanese yen’s pair fell 0.1% on Tuesday after rising as high as 158 yen in recent sessions, after the Bank of Japan signaled that it will take its time to consider more interest rate hikes.
The Australian dollar’s pair fell 0.2% after the minutes of the Reserve Bank’s December meeting showed policymakers saw an eventual easing in monetary policy, citing some progress in bringing down inflation. But they still flagged potential upside risks for inflation.
The Chinese yuan’s pair rose 0.1% and remained close to a one-year high, as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
The Singapore dollar’s pair rose 0.1%, while the Indian rupee’s pair rose 0.1% after hitting record highs above 85 rupees.
Investing.com — The dollar has surged past its post-2022 range, buoyed by U.S. economic exceptionalism, a widening interest rate gap, and elevated tariffs, setting the stage for further gains next year.
“Our base case is that the dollar will make some further headway next year as the US continues to outperform, the interest rate gap between the US and other G10 economies widens a little further, and the Trump administration brings in higher US tariffs,” Capital Economics said in a recent note.
The bullish outlook on the greenback comes in the wake of the dollar breaking above its post-2022 trading range, reflecting renewed confidence among investors driven by robust U.S. economic data and policy expectations.
A key risk to the upside call on the dollar is a potential economic rebound in the rest of the world, similar to what occurred in 2016, Capital Economics noted.
Following the 2016 U.S. election, economic activity in the rest of the world rebounded, while Trump’s tax cuts didn’t materialize until the end of 2017, and the Fed took a more dovish path than discounted, resulting in a 10% drop in the DXY on the year, which was its “worst calendar year performance in the past two decades,” it added.
While expectations for a recovery in Europe and Asia seem far off, a positive surprise for global growth “should be ruled out”, Capital Economics said.
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