The euro is headed for its fourth straight weekly decline against the dollar, its steepest in about four months, as France's fiscal troubles collide with a hawkish Federal Reserve. French bond yields have jumped to levels last seen in 2002, while traders now wait on Friday's US payrolls report for the next move.
The euro rose 0.15% to $1.126 on Friday but stayed on track for a 1.17% weekly fall, its biggest since early June, as investors weighed France's fiscal trajectory against the Federal Reserve's hawkish shift. The single currency slid on Thursday before recovering some ground Friday as oil prices dropped amid mixed supply signals.
The dollar often draws support from higher oil prices, as investors cut exposure to currencies of major energy importers such as the euro and yen, which are seen as more vulnerable to a rise in crude costs.
French bonds sell off on fiscal and political risk
French and Italian government bonds have come under selling pressure in recent weeks amid expectations for rising policy rates and growing political risk ahead of 2027 elections, with French 10-year yields jumping to their highest level since 2002 on Thursday. The yield gap between French bonds and Bunds widened to about 150 basis points on Friday, the highest level since the euro area's sovereign debt crisis in 2011. The sell-off showed signs of spreading to debt-laden countries such as Italy and Greece, despite their improved fiscal trajectories.
According to Reuters: Jane Foley, senior forex strategist at Rabobank, said "the outlook for the euro is clearly on a weakened footing relative to last year", pointing to low European gas storage, high energy prices, competition from China, a weakened chancellor in Germany and the risk of hybrid attacks from Russia. She also flagged that France's budget and political backdrop have weighed on the currency.
Thierry Wizman, global forex and rates strategist at Macquarie Group, said a populist far-right or far-left government in France could make fiscal adjustment harder, adding that campaign rhetoric around debt and budget politics is likely to get louder.
Dollar extends its run as Fed holds a hawkish line
The dollar index was down 0.15% at 101.90 but set for a 0.85% gain this week, its third consecutive weekly rise — a run it last had in May 2025. The Federal Reserve raised rates and signalled more hikes in mid-September, with Chair Kevin Warsh reaffirming the Fed's independence despite repeated calls from President Donald Trump for lower borrowing costs.
Attention switches to US payrolls
Investor focus now turns to the US payroll report due later Friday, with data expected to show job growth slowed in September. The unemployment rate is forecast at 4.1% for a third straight month. The report follows data on Wednesday showing US consumer prices rose less than expected in August, along with downward revisions to July's figure, leading traders to rein in rate-hike wagers for later this month.
Two of the Fed's top policymakers this week made an unusually clear case for waiting on more data before deciding on another hike. Traders are now pricing a 72% chance of the Fed holding rates steady in October, up from 36% a week earlier, according to the CME FedWatch tool, though they still expect a rate hike by year-end.
Source: Investing.com
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