The euro fell on Monday as high energy prices added to concerns over political stability in France after some of its worst unrest in years. Analysts say the currency tends to come under sustained pressure only if French tensions spread beyond the country's borders. Rate expectations for the Fed and the ECB remain a main driver.
The euro dropped 0.25% to $1.1210 on Monday, as energy costs compounded worries about France after widespread weekend rioting. The Elysee presidential office said that President Emmanuel Macron declined Interior Minister Laurent Nunez's offer to resign.
Euro fell more than 1% as French spread widened
Analysts noted that the euro's reaction in early October was much more dramatic. It fell more than 1% at the turn of the month after the spread between French OATs and German Bunds, a safe-haven benchmark, widened by about 40 basis points to above 150 bps within days.
On Monday, the French spread was last up 2 bps at 141 bps. Analysts said the single currency tends to come under sustained pressure only if French political tensions weigh on sentiment across the euro zone.
Oil and central banks set the dollar's backdrop
The interest-rate outlook returned as a main market driver, helped by the Fed's September rate hike, which reassured investors that US policymakers remained committed to tackling inflation. Higher oil prices have supported the dollar while weighing on energy-importing currencies such as the euro and yen since the conflict in Iran erupted in March.
Brent crude futures slipped from a five-month high but were still above $100, and natural gas prices hit a fresh 4-year high at €89.13.
Commerzbank's Thu Lan Nguyen said that for euro/dollar, it is currently less the oil price itself that matters than how the Fed and ECB respond to it. According to Nguyen: "the dollar will struggle to fully capitalize on the fundamental advantage" unless markets expect a much more forceful Fed reaction to the inflationary shock.
Markets see an 87% chance that the Fed will keep rates unchanged this month, while pricing in 75 basis points of easing by the end of 2027.
Source: Reuters via Investing.com
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