By Amanda Cooper

LONDON (Reuters) -The euro rose on Tuesday, regaining some poise after political turmoil in France sent traders scrambling for hedging protection against further price swings, while the yuan hit a 13-month low on tariff risks and weakness in China’s economy.

The yen, which has gained nearly 4.5% in the last two weeks, retreated slightly against the dollar, but remained near six-week highs, as traders are growing increasingly confident that Japan may hike rates this month.

The euro, which had been the weakest G10 currency through November, began this month with a 0.7% fall on Monday and was last up 0.2% at $1.05185, as France’s government heads for collapse over a budget impasse. [EUR/GVD]

French Prime Minister Michel Barnier faces a vote of no confidence on Wednesday after fierce opposition from across the political spectrum to his budget, which contains painful tax rises and spending cuts aimed at repairing the country’s precarious finances.

Demand for hedges, as reflected by euro options volatility, has hit its highest since March 2023 this week and, with the combination of a string of weak data, political uncertainty in major euro zone economies and the seemingly unstoppable dollar, the single European currency could struggle.

“There is just so much going against the euro at the moment…the list of headwinds is just growing longer by the day,” City Index market strategist Fiona Cincotta said.

“Today, you’ve got political instability in France, obviously and even in Germany, it’s rumbling and there’s sort of a sense of unease in that you’ve got the weak economic outlook,” she said.

In the last month, the euro has lost 3% against the dollar and more than 1% against both the pound and the Swiss franc.

DOLLAR RESTING, FOR NOW

The dollar typically suffers seasonal weakness in December as companies tend to buy foreign currencies. However, traders are keeping a wary eye this year on President-elect Donald Trump’s incoming administration and supporting the greenback.

Over the weekend, Trump threatened punitive tariffs unless BRICS member countries committed to the dollar as a reserve currency.

“The remarks strengthen the view that Trump may not look to weaken the dollar during his presidential term and will instead be relying on tariffs to tackle the U.S.’s large goods trade imbalance,” Rabobank strategist Jane Foley said in a note.

“We maintain the view that euro/dollar could drop to parity around the middle of next year. The timing may coincide with the introduction of new tariffs by Trump.”

had already sold off in anticipation of more tariffs from Trump and improving U.S. manufacturing data and a dive in Chinese bond yields to record lows have pulled the currency towards 7.3 per dollar for the first time since last November. [CNY/]

China fixed the yuan’s trading band at its weakest in more than a year and traders ran with it to sell the currency at 7.2996 per dollar. It traded at 7.24 on Friday. [CNY/]

The Australian dollar was up 0.2% at $0.6488, reversing some of the previous session’s 0.7% fall. Economic data was mixed, with a bigger-than-forecast current account deficit countered by a jump in government spending that is likely to boost growth.

The yen, the only G10 currency to gain on the dollar last month, touched its strongest since late October on Monday at 149.09 to the dollar and was last at 149.69, leaving the dollar up 0.1% on the day.

Markets are pricing in a near-60% chance of a 25 basis point rate hike in Japan this month.

The overriding question for investors is what Friday’s U.S. employment data will show and how likely it makes another rate cut from the Federal Reserve this month. Right now, there is a roughly 70% chance of a cut.

Job openings figures are due later on Tuesday.

Investing.com — The US dollar has surged to two-year highs following the recent US presidential election, reversing from its prior lows just two months ago.

While the current strength of the greenback appears robust and market conditions remain favorable, strategists at UBS caution that it may not present a compelling buy opportunity for investors.

The rapid rebound of the dollar has been driven by stronger US economic data compared to other regions and heightened concerns over global growth. The dollar’s trajectory was further bolstered by the re-election of Donald Trump, which reduced the likelihood of significant US rate cuts.

This, coupled with global GDP growth uncertainty, US tariff threats, and US yields staying “higher for longer,” implies that the currency’s strength may persist heading into 2025. However, “it does not necessarily make the dollar a buy,” UBS strategists led by Dominic Schnider said.

The dollar has experienced a 6% rebound in the from its September low, a move equivalent to approximately one standard deviation. Strategists highlight that much of the positive news supporting the dollar appears to have already been factored into the market. As a result, they advise against pursuing further dollar strength at this stage.

The team also points to the limited sustainability of the dollar’s current valuation, citing its “extraordinarily rich valuation in trade-weighted terms.”

“This makes the USD a sell for us on any additional spikes, in our view, rather than adding to long positions. Put differently, we see value in a contrarian bias for most currency pairs,” strategists said.

In this context, the bank advocates for contrarian strategies, favoring currencies like the and , which could benefit from diverging monetary policies. Within Europe, the British emerges as UBS’s top pick, supported by better UK growth prospects and higher yields.

Emerging market currencies also offer select opportunities. UBS identifies the South African , , and as attractive for total returns, although trade risks remain a factor for export-oriented currencies like the and .

Looking ahead, UBS foresees a 6% decline in the broad DXY over the medium term, driven by easing US yields and the diminishing benefits of Trump’s initial economic policies.

Investing.com– Most Asian currencies extended declines on Tuesday with the Chinese yuan hitting a one-year low, as markets assessed the impact of new U.S. export restrictions targeting China’s semiconductor industry.

The U.S. is set to implement its third major crackdown on China’s semiconductor industry, targeting 140 entities with new export restrictions aimed at curbing China’s access to advanced chips and equipment vital for artificial intelligence and other high-tech applications.

The move, which is seen as a direct challenge to China’s technological ambitions, stirred volatility in regional currency markets, particularly for the Chinese yuan.

This comes at a time when sentiment around regional currencies had already been dampened due to U.S. President-elect Donald Trump’s recent threat to impose 100% tariffs on goods from BRICS nations (Brazil, Russia, India, China, and South Africa) if they move to undermine the U.S. dollar by creating or backing alternative currencies. Before that, he vowed to impose additional tariffs on China.

Chinese yuan hits 1-yr low on new US export curbs

The Chinese yuan fell against the dollar, with the onshore pair rising 0.3% to its highest level since mid-November 2023.

The latest export restrictions are expected to exacerbate China’s challenges in its push for technological self-sufficiency, further dampening investor sentiment towards the yuan.

Markets across the region are closely watching the U.S.-China trade situation, with fears of further restrictions or retaliatory measures adding to the volatility. 

The Australian dollar, which is sensitive to the Chinese economy, weakened slightly, with the pair remaining close to four-month lows. Third-quarter Australian data is due on Wednesday.

Dollar strength creates further pressure on Asia FX

Asian currencies have also faced downward pressure from the dollar, which gained for eight consecutive weeks before falling in the last one. Expectations of a slower rate cut path due to stubborn inflation and chances of inflation remaining high with the incoming president Trump have supported the greenback.

The extended gains, inching up 0.1%, while the also ticked up 0.1%.

The South Korean won’s pair, heavily influenced by semiconductor exports, was largely unchanged. South Korean consumer inflation read softer than expected for November, keeping the prospect of more interest rate cuts by the Bank of Korea in play.

The Japanese yen’s pair rose 0.4%, and the Taiwan dollar’s pair edged 0.2% higher, while India’s was muted.

The Philippine peso’s pair was largely unchanged at 58.685 per U.S. dollar.

The Philippines revised its 2024 economic growth forecast, lowering the target to 6.0%–6.5%, down from a previous high of 7%. This adjustment comes amid ongoing domestic and global uncertainties, according to a government panel. Additionally, the peso’s expected average for 2024 has been adjusted to a range of 57.00–57.50 per dollar, from the earlier estimate of 56.00–58.00.