Euro on track for biggest monthly fall since January, US dollar breaks 161 yen
The greenback rises following the presidential debate between Biden and Trump
THE euro was on track for its biggest monthly fall since January amid political uncertainty in the run-up to France’s general elections, while the US dollar jumped to a near four-decade high against the battered yen ahead of key inflation data.
Investors fear that a new French government could increase fiscal spending, threatening the sustainability of the country’s public debt and the financial stability of the bloc.
At the same time, traders are cautiously testing Japan’s determination to protect its currency, as they look out for US inflation data.
The risk premium investors demand to hold French government bonds rose to its highest since 2012 on Friday (Jun 28).
This comes ahead of the first round of voting at this weekend’s parliamentary elections, as investors expect a new government led by a far-right or far-left coalition to increase fiscal spending.
“The markets remain priced for a relatively benign scenario of a gridlocked legislature or a Rassemblement Nationale government, which only partially implements its manifesto,” said Aman Bansal, director of European rate strategy at Citi.
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He added that the spread between French and German government bond yields, which represents a gauge of French debt risk premium, could widen.
If the far-right or the far-left implements most of their manifesto and President Emanuel Macron resigns, the spread could extend to 135 basis points (bps) from its current 84 bps, Bansal predicted.
Barclays rate strategist Lefteris Farmakis flagged that for “every 15 bps of French yield spread widening against Germany, the euro weakens by 0.5 to 1 per cent”.
The euro was up 0.05 per cent at US$1.0707, and set to end the month with a 1.25 per cent drop. This marks the biggest decline since January, when it fell by about 2 per cent.
“Our eurozone team suspects it will be too early for a new government to substantially water down its pre-election pledges and that it may well be a rocky few months into September,” said Chris Turner, head of forex strategy at ING.
The yen hit 161.27 per US dollar, its weakest since 1986, and was last down 0.1 per cent at 160.52.
“Dollar-yen is very much US-interest rate driven,” said Rong Ren Goh, a portfolio manager in the fixed income team at Eastspring Investments in Singapore.
“If the intent is to stall severe yen depreciation, they might also want to save bullets for occasion when and if US Treasury yields stage another rally in the second half, which is highly possible against the backdrop of Treasury supply and fiscal deficit issues,” he added.
US presidential debate
Republican US presidential candidate Donald Trump unleashed a barrage of at-times false attacks on President Joe Biden in their first campaign debate in Atlanta.
The US dollar rose as Biden stumbled over his words a few times during the debate’s early exchanges. The moves were fairly modest as traders bought the greenback.
“A Trump victory is dollar-positive for several reasons, including a presidency that may be more aggressive on tariffs and could lead to more fiscal expansion, which is inflationary and would trigger higher policy rates,” Barclays’ Farmakis said.
The US dollar index reached Wednesday’s eight-week high of 106.13 and has logged a 1.5 per cent rise for the quarter so far. It was last flat at 105.87.
It is the second quarterly gain in a row as markets have trimmed expectations for US rate cuts over the past six months.
The Federal Reserve’s preferred inflation measure, the personal consumption expenditures index, is due later on Friday. If its annual growth slowed to 2.6 per cent in May, as economists expect, it may open the way to cuts later this year.
The quarter’s biggest loser has been the yen, down 6 per cent against the US dollar since the end of March, and more than 12 per cent in 2024 so far.
Core inflation in Japan’s capital accelerated in June, data showed on Friday. However, it did little to support the yen.
Low Japanese interest rates have encouraged selling yen for higher-yielding currencies even as Japanese yields have started to rise and officials have warned of another round of currency intervention.
Japan replaced top currency diplomat Masato Kanda on Friday with financial regulation expert Atsushi Mimura. Finance minister Shunichi Suzuki said authorities were “deeply concerned” about the impact of “rapid and one-sided” yen moves. REUTERS
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