The Euro weakened on Monday as soaring energy costs added to concerns about France’s political stability following some of the country’s worst unrest in years.
President Emmanuel Macron has rejected Interior Minister Laurent Nunez’s offer to resign after widespread rioting over the weekend, the Élysée Palace said on Monday.
Analysts said the Euro’s response to events in early October was far sharper and followed a familiar pattern: the single currency typically faces sustained downward pressure only when political tensions in France spread beyond its borders and undermine confidence across the wider eurozone.
The Euro fell 0.25% to $1.1210. It had lost more than 1% at the start of the month after the yield gap between French government bonds (OATs) and safe-haven German Bunds widened by around 40 basis points in just a few days, climbing above 150 basis points and pushing up risk premiums across other eurozone countries.
The French-German spread was last 2 basis points higher on Monday at 141 basis points.
Investors reassessed their outlook for the foreign exchange market last week, after the US Dollar had been supported for months by strong American economic growth and stock market gains fuelled by the AI boom.
They are increasingly concerned that AI-related spending could lose momentum as the outlook for investment in the sector weakens. This could slow US economic growth and reduce borrowing requirements, potentially putting downward pressure on both the Dollar and Treasury yields.
Interest rate expectations have also returned to the forefront of market activity, supported by the Federal Reserve’s September rate hike, which reassured investors that US policymakers remained committed to bringing inflation under control.
Rising oil prices have bolstered the US Dollar since the conflict in Iran began in March, while putting pressure on energy-importing currencies such as the Euro and Japanese Yen.
Brent crude futures retreated from a five-month high but remained above $100 a barrel, while natural gas prices climbed to a fresh four-year peak of €89.13.
Markets are pricing in an 87% probability that the Federal Reserve will leave interest rates unchanged this month, while anticipating a cumulative 75 basis points of rate cuts by the end of 2027. Expectations for the European Central Bank have followed a similar path.
The US Dollar index gained 0.26% to reach 102.05.
Furthermore, the greenback edged 0.05% higher to 158.15 Yen. Bank of Japan Governor Kazuo Ueda said on Monday that underlying inflation was “quite close” to the central bank’s 2% target, signalling that further interest rate hikes could be on the table.
However, concerns that Prime Minister Sanae Takaichi’s spending plans could add to Japan’s already substantial debt burden continued to dampen investor sentiment.
In addition, the Dollar slipped 0.05% against the offshore Chinese Yuan to 6.6815, its lowest level since June 2022, after data released on Monday showed China’s third-quarter GDP growth had marginally exceeded expectations.