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Euro hits lowest in 6-1/2 months vs dollar on tariff worries

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By Stefano Rebaudo

(Reuters) – The euro dropped to its lowest level in 6-1/2 months against the greenback on Monday (NASDAQ:) as investors worried about possible U.S. tariffs that would hurt the euro area’s economy.

Meanwhile the — a measure of its value relative to a basket of foreign currencies — slightly overshot the highs seen right after the U.S. presidential election with markets still waiting for clarity about future U.S. policy.

The sensitivity of the euro to the threat of higher U.S. import tariffs was evident late Friday when media reported that President-elect Donald Trump was lining up Robert Lighthizer, seen as a hawk on trade, to run his trade policy, analysts said.

Sources familiar with the matter said Trump has not asked Lighthizer to return to the agency overseeing trade policy.

The single currency was down 0.6% at $1.0657, after hitting $1.0656, its lowest level since May 1. It dropped 0.78% on Friday.

Politics remained under the spotlight after German Chancellor Olaf Scholz paved the way for snap elections. However, the risk of policy changes in Germany which could lead to a looser fiscal policy will be rising next year.

“The thesis for dollar bears now is that it will take a while for tariffs to come through and the Fed recalibration to less restrictive monetary policy,” said Chris Turner, head of forex strategy at ING.

“We disagree and think this clean election result can boost U.S. consumer and business sentiment at the same time as it weighs on business sentiment elsewhere in the world,” he added.

The was 0.45% firmer at 105.44, after hitting 105.50, its highest since July 3. Last week, it jumped more than 1.5% to 105.44, after U.S. presidential election results showed Trump’s victory.

MIXED VIEWS ON THE GREENBACK

Trump “will be less encumbered by the political considerations of having to run for office again,” said Libby Cantrill, head of U.S. public policy at PIMCO.

“However, what look to be narrow congressional margins – potentially historically narrow in the House – could be a check on Trump’s agenda, fiscal and otherwise,” she added.

Measures from the U.S. President-elect — including tariffs and tax cuts — should put upward pressure on inflation and bond yields while limiting the Fed’s scope to ease policy and supporting the greenback.

Lee Hardman, senior currency analyst at MUFG, flagged a media report suggesting earlier this year that Lighthizer was considering weakening the greenback.

“Higher tariffs could be used to force other countries to agree to revalue their currencies against the U.S. dollar,” he said, mentioning the Plaza Accords in 1985.

The Plaza Accords was an agreement between five major economies to depreciate the greenback through coordinated currency market interventions.

The dollar gained 0.8% on the yen to 153.80, having been dragged off last week’s top of 154.70 by the risk of Japanese intervention. On Nov. 6 it hit 154.68, its highest level since July.

A summary of opinions from the Bank of Japan’s October policy meeting showed some members were unsure on when to raise rates also due to political uncertainty.

The rate outlook will be crucial for the greenback while all major central banks ease their monetary policy.

The U.S. bond market is closed for a public holiday on Monday, though stocks and futures are open.

Citi expects U.S. rates to stay close to current levels in the near term as the market is caught between expectations of significant policy changes in 2025 and the easing cycle driven by near-term data.

Disappointment at the latest Chinese stimulus package had seen the Australian and New Zealand dollars slide on Friday.

The U.S. dollar versus the hit its highest since early August at 7.2225, up 0.4% on Monday. It jumped 0.70% on Friday after falling 0.75% the day before.

© Reuters. FILE PHOTO: A shopper pays with a ten Euro bank note at a local market in Nantes, France, September 17, 2024. REUTERS/Stephane Mahe/File Photo

Highlighting the bleak background in China, data out over the weekend showed consumer prices rose at the slowest pace in four months in October, while producer price deflation deepened.

soared to a record high above $81,000 on Monday on expectations that crypto-currencies will boom in a favourable regulatory environment following the election of Trump as U.S. president and pro-crypto candidates to Congress.

Forex

Aussie dollar outlook hinges on US trade policy under Trump, says BofA

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Investing.com– There are three potential scenarios for the Australian dollar through mid-2025, contingent on U.S. policy under President-elect Trump, analysts at Bank of America (BofA) said in a note, stating a wide range of outcomes for the currency, reflecting uncertainties in global trade.

In BofA’s baseline scenario, the AUD is expected to weaken to 0.63 U.S. dollar (USD) by mid-2025. This forecast assumes a continuation of tariff-driven trade policies similar to Trump’s first term, alongside moderate gains in U.S. equities, with the projected to deliver double-digit returns.

A gradual increase in U.S.-China tariffs, coupled with a devaluation of the (CNY), is anticipated to exert downward pressure on the AUD. Industrial metals, a key driver for Australia’s economy, are also expected to decline, adding to the currency’s challenges.

BofA’s second, and a more severe scenario envisions a full-blown trade war, where tariffs significantly disrupt global trade. In this situation, the AUD could tumble to 0.55 USD, the bank warned. It cites, a sharp devaluation of the CNY and plummeting industrial metal prices, as major headwinds.

This scenario assumes broader global equity market declines and a more pronounced impact on Australian growth and inflation, potentially keeping the AUD below 0.60 USD for an extended period.

Thirdly, if the incoming administration adopts policies akin to Ronald Reagan’s 1980s approach—characterized by tax cuts, deregulation, and limited trade disruptions—the AUD could climb to 0.70 USD, BofA analysts said. Such policies could spur a rally in U.S. equities and stabilize the CNY, creating a favorable environment for the Australian currency.

BofA underscores the AUD’s heightened sensitivity to global risk sentiment and its evolving relationship with commodity prices and the CNY. Analysts emphasize that significant shifts in U.S. policy will likely dictate the trajectory of the AUD in the near term.

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UBS lowers USDJPY forecasts to 145 by end-2025 and end-2026

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Investing.com — UBS has revised its forecasts for the , lowering expectations to 145 for both end-2025 and end-2026, down from previous estimates of 157 and 161, respectively.

This adjustment reflects growing confidence in the Bank of Japan’s (BOJ) ability to implement further rate hikes, aligning with UBS economists’ call for a 25 basis-point hike during the December 19 policy meeting.

“Rising confidence in the BOJ’s ability to hike rates further has been the key driver of the move,” UBS analysts noted, as the yen continues its recent outperformance against the dollar.

The revision to UBS’s USDJPY outlook also aligns with the bank’s broader FX trading views. The firm remains short , expecting it to decline to 151 by the end of 2025 and to 145 by the following year.

In the broader G10 FX market, UBS observed a period of stability in recent weeks, with the USD trading near mid-November highs.

This calm persisted despite President-elect Donald Trump’s tariff-related announcements on social media. While markets initially viewed these proclamations as a negotiation tactic, UBS warned that this sentiment might be “short-lived.”

Additionally, political uncertainty in Europe, including a no-confidence vote against the French government, could weigh on the euro.

“We see potential for a larger and more sustained impact now than in June, given the weaker growth backdrop and dovish ECB repricing,” UBS analysts explained. This situation supports their end-2025 target of 1.04.

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Dollar shows strength; euro retreats ahead of French no-confidence vote

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Investing.com – The US dollar rose Wednesday, while the euro retreated ahead of a vote of no-confidence in France later in the day that is likely to topple the fragile coalition government. 

At 04:45 ET (09:45 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 106.465. 

Dollar remains compelling

The dollar has been in demand Wednesday, boosted by its safe-haven status amid political turmoil in both South Korea and Europe as well as ongoing conflicts in the Middle East and Ukraine.

“A lame duck government in Germany and potentially France too today if a no-confidence vote is successful, plus this Korean news, will only add to confidence that the relatively high rates and liquidity make the dollar the most compelling currency in which to park cash balances right now,” said analysts at ING, in a note.

Turning back to macro news, all eyes will be on the report for November later in the session, particularly with the widely watched monthly due for release on Friday. 

The release is also on the agenda, as well as a speech from Fed Chair in Washington.

“There is the risk that US macro data softens a little and can drag the dollar a little softer, but taking defensive positions in something like the Japanese yen or Swiss franc can be expensive,” ING added.

Market-implied odds of a quarter-point rate reduction on Dec. 18 last stood at 75%, according to CME’s FedWatch Tool.

Euro pressured by French political crisis

In Europe, dropped 0.1% to 1.0501, with the single currency struggling for support as the French political crisis comes to a head.

French lawmakers are preparing to vote on no-confidence motions later in the day that are all but certain to topple the government, with opposition parties seemingly unable to support Prime Minister Michel Barnier’s recent  budget aimed at curbing a hefty budget deficit.

Additionally, data released earlier Wednesday showed that business activity across the eurozone fell sharply last month as the bloc’s dominant sector joined the manufacturing sector in contraction territory.

HCOB’s final for the currency union, compiled by S&P Global and seen as a good gauge of overall economic health, sank to 48.3 in November from October’s 50.0.

“Be it European political risk, weak activity, the threat of trade wars or energy prices creeping higher (EU gas inventories are starting to come under pressure) there are many reasons to be underweight in the euro,” ING said.

traded 0.1% higher to 1.2677, helped by remaining in expansion territory.

Bank of England Governor Andrew Bailey reiterated in an interview published on Wednesday that gradual cuts in interest rates are likely over the next year, adding that the process of falling inflation is well embedded.

“There is still a distance to travel because although inflation came down to target over the summer, we’ve been saying for a while that … we were probably going to go back a bit above target,” Bailey said.

South Korean won stabilizes

In Asia, stabilized at 1,414.26, after surging as high as 1,444.05 won in overnight trade – its highest level since November 2022.

South Korean President Yoon Suk-Yeol declared martial law on Tuesday in an effort to counter “anti-state forces” among his political opponents. However, the move faced immediate backlash, including parliamentary rejection and public protests, leading him to revoke the measure within hours.

The won also pared initial losses as South Korea’s central bank held an emergency meeting to stabilize the domestic market.

climbed 0.7% to 150.68, while slipped 0.2% to 7.2730, with the Chinese currency bouncing from the previous day’s low of 7.3145, the weakest since November of last year, helped by a stronger-than-expected central bank midpoint fixing. 

slumped 1% to 0.6421, falling to its lowest level since early August after data showed Australia’s economy grew less than expected in the third quarter, sparking increased bets that the Reserve Bank will cut interest rates early in 2025.

 

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