By Naomi Rovnick and Dhara Ranasinghe

LONDON (Reuters) -As the euro heads for its worst month since early 2022, analysts warn that a wild ride in the currency could be the next source of global market volatility after gyrations in Japan’s yen sparked a bout of cross-asset turmoil in August.

Europe’s single currency has slumped by just over 3% against the dollar in November. It is now teetering towards the key $1 mark, pressured by U.S. President-elect Donald Trump’s proposed trade tariffs, euro zone economic weakness and an escalating Russia/Ukraine conflict, just as U.S. growth bets lift U.S. stocks and the dollar.

France’s political woes are another potential headwind, with French consumer confidence at a five-month low and the fate of the new government and its budget at risk.

Investors and currency traders, however, are divided about what comes next because the dollar is also vulnerable to inflationary tariffs and government debt increases shaking faith in U.S. markets and the economy.

This uncertainty could increase if the euro drops further, raising the threat level for unexpected currency shifts that could upend highly popular so-called Trump trades, which bank on the euro falling as U.S. stocks rise, analysts said.

“We’ll get volatility because people will start to think: Are we breaking through (euro-dollar) parity or will it snap back?” Societe Generale (OTC:) head of FX strategy Kit Juckes said.

“The minimum we will see is more debate in both directions about the euro and I don’t trust these extraordinarily high levels of cross-asset correlations to continue.”

August’s market rout began with yen-dollar swings that caught hedge funds betting against the Japanese currency off guard and swelled into stock market selling to fund margin calls.

Regulators have warned about market fragility to similar events when popular market narratives rapidly shift, because of high levels of leverage in the system.

“If we crash through (euro-dollar) parity we’ll be having those kinds of conversations again,” Juckes said.

SPILLOVERS

The euro-dollar is the world’s most actively traded currency pair and rapid exchange rate shifts can disrupt multinationals’ earnings and the growth and inflation outlook for nations that import commodities and export goods priced in dollars.

“The euro is a benchmark,” Barclays (LON:) global head of FX strategy Themos Fiotakis said, meaning trade sensitive nations such as China, South Korea and Switzerland could allow their currencies to weaken against the dollar if the euro dropped further so they can compete with euro zone exports.

Britain’s pound, down just over 2% against the dollar this month to around $1.26, is highly sensitive to euro moves, he added.

Market sensitivity to the euro-dollar rate has also risen after what currency strategists said was a rush by traders into options contracts that combine bets on cross-asset outcomes from Trump’s policies, such as the euro weakening and the S&P rising.

“We’ve seen a lot of people trying to invest in (these) conditional outcomes,” Fiotakis said, which could raise the correlations between currency moves and wider markets.

Investors were underestimating that risk, UBS strategist Alvise Marino said.

A gauge of investor demand for protection against near-term euro-dollar swings is trading around 8%, well below a level of almost 14% when the euro last slumped below $1 in October 2022.

“Realised volatility in FX is likely to be high, and certainly higher than markets are pricing in,” Marino said.

He is recommending clients hedge against currency swings via derivatives contracts that pay out if euro volatility is higher a year from now.

SPLIT VIEWS

Long term asset managers, meanwhile, are deeply divided on where the euro and the dollar go from here, underscoring how this crucial exchange rate could be set for a bumpy ride in coming months.

“We are looking for the euro to go to 99 cents by the middle of the next year,” said Willem Sels, global chief investment officer at HSBC’s private banking and wealth unit.

But Vincent Mortier, chief investment officer of Amundi, Europe’s largest asset manager, said euro zone rate cuts could boost euro zone business and consumer spending and lift the euro to $1.16 by late 2025.

Traders in the fast-moving currency options market were late on Tuesday pricing a 56% probability of the euro being higher than its current level of about $1.047 at year-end, despite big banks like JP Morgan and Deutsche Bank (ETR:) saying a move to $1 could happen, depending on tariffs.

Rising bets on the European Central Bank lowering rates by half a percentage point to 2.75% next month have weakened the euro.

But a popular market narrative that Trump’s aggressive growth policies and import taxes will boost U.S. inflation and keep rates high and the dollar mighty is also starting to fray.

Eurizon SJL Capital CEO Stephen Jen said the U.S. risked a so-called bond vigilante moment if the White House’s lenders in the $27 trillion Treasury market push debt costs higher to try and curb tax cuts funded by excessive borrowing.

A consequent tightening of financial conditions “should allow a soft landing in the U.S. economy and lower long-term interest rates,” he said, making the dollar overvalued.

By Gleb Bryanski

MOSCOW (Reuters) -The Russian rouble weakened beyond the 110 mark to the U.S. dollar on Wednesday, a threshold that some analysts believe could prompt authorities to take action to support the currency, which has fallen by more than 24% since early August.

The rouble’s fall caught off guard economists who had expected the Russian currency to hit the 100 mark against the dollar in one year, according to the Reuters poll in early November. It hit a 32-month low last week.

By 1300 GMT the rouble was down 3.42% at 109.10 against the dollar, after touching 111.20, according to LSEG data. It was down by almost 2% at 14.97 against the yuan, also the lowest level since March 2022, the first month of Russia’s invasion of Ukraine.

The rouble’s fall has been compounded by a fall of more than 20% in the stock market so far this year as investors shift their savings from stocks to deposits, which offer interest above the central bank’s benchmark rate of 21%.

“The market is awaiting the financial authorities’ reaction for the rouble’s devaluation,” BCS brokerage analysts said, stressing that forex purchases “resembled panic in an environment of uncertainty”.

Analysts are now predicting that the rouble may hit 115-120 before the end of the year, with some calling on the government and the central bank to take action such as forcing exporters to sell more forex and increasing forex sales by the state.

“Possible measures may include increasing foreign currency sales by the central bank through adjustments to the parameters of operations under the budget rule and additional capital controls,” said analyst Sofya Donets from T-Bank.

INFLATION CONCERNS

The rouble’s fall is fuelling inflation, which is set to exceed the central bank’s estimate for this year, working counter to the regulator’s painful monetary tightening with the benchmark interest rate at the highest level since 2003.

The central bank estimates that the rouble’s weakening by 10% adds 0.5 percentage points to inflation, implying that the rouble’s four-month fall could add 1.5 percentage points to the current inflation rate.

“For the central bank, it represents a challenge in combating rising prices,” economist Evgeny Kogan said.

The central bank and the finance ministry did not respond to a Reuters request for comment on the exchange rate.

The rouble’s slide was exacerbated by the new sanctions on Russia’s financial sector, which disrupted foreign trade payments, especially for oil and gas, creating a physical shortage of currency in the Russian market, analysts said.

Most Russian major banks are now under the U.S. sanctions and are therefore unable to carry out bank transactions in dollars and the only remaining option to trade foreign currency for them is to import large quantities of dollar cash.

All trade in dollars and euros moved to the over-the-counter market after Western sanctions were imposed on the Moscow Exchange (MOEX). As a result, the trade has become volatile and opaque, with most banks disclosing data only to the regulators.

Many analysts stressed that apart from a new round of tensions with the West over Russia’s military action in Ukraine and new financial sanctions, there were no fundamental reasons for the fall, with prices for oil, Russia’s main export, broadly stable.

The weak rouble is beneficial for exporting companies, according to Finance Minister Anton Siluanov, with prices for Russia’s energy exports mostly set in dollars.

It is also helping the Russian government to increase the state budget revenues from energy taxes and export duties.

“The main reason for such a significant weakening is that, in our opinion, this weakening is desirable, said Finam brokerage analyst Nikolai Dudchenko. “Today, the exchange rate is very much conducive to balancing the budget,” he added.

Investing.com – The US dollar retreated Wednesday, consolidating against its major peers ahead of  the release of a key US inflation figure later in the session. 

At 04:45 ET (09:45 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.4% lower to 106.500, falling back further from last week’s two-year peak. 

Dollar consolidates ahead of PCE data

Foreign exchange traders appear to be cashing in dollar gains ahead of the release of the October price index, due later in the session, before US markets close for the Thanksgiving holiday on Thursday.

The safe-haven US currency had received support from President-elect Donald Trump’s threat to impose tariffs on Canada, Mexico and China, reigniting fears of a global trade war, with dire implications for global economic growth.

The measures are also widely seen as potentially inflationary for the US economy, which could prevent the Federal Reserve from cutting interest rates substantially.

“The highlight of today’s session will be the release of the US October core PCE deflator, expected at 0.3% MoM,” said analysts at ING, in a note. 

“Even though the market has largely moved on from the US inflation story, a sticky reading will add to doubts that the Fed needs to cut in December after all. Expect the dollar to largely hold recent gains, although month-end selling remains a risk.”

Euro pressured by weak economic outlook

In Europe, gained 0.3% to 1.0514, helped by the session’s dollar weakness, but the single currency remains under pressure given the weak European economic outlook.

Data released earlier Wednesday showed that France’s index fell in November, hit by households’ rising fears about unemployment.

The monthly business survey published by INSEE showed that the sentiment indicator fell to 90 from a revised reading of 93 in October.

The European Central Bank has cut rates three times already this year, and is widely expected to cut once more in December.

traded 0.3% higher to 1.2607, pushing further away from last week’s six-week low.

“With one-week deposit rates at 4.75% and the highest in the G10 space, sterling may be deriving some inflows as the market makes up its mind about the speed and magnitude of Trump’s policy agenda,” said ING. 

“Additionally, the Bank of England rate profile continues to get traded closer to the Fed than the ECB and suggests sterling should outperform against the euro.”

Yen gains on safe-haven bets

fell 1% to 151.58, with the Japanese yen helped by safe-haven bids, as well as growing bets for a December rate hike in Japan.

slipped slightly to 7.2505, but still remained near a four-month high amid concerns that Trump’s potential tariffs will hit the already-weakened Chinese economy.

rose 0.9% to 0.5889, rebounded from multi-month lows after the country’s central bank cut interest rates by 50 basis points and signaled further easing early next year, citing subdued domestic economic activity and waning inflationary pressures.