Global Market: Euro falls as French political unrest, high energy prices weigh on sentiment

Political uncertainty, energy prices and shifting rate expectations keep currency markets on edge.

The euro declined 0.25% to $1.1210, extending pressure from earlier in October when it dropped more than 1% amid rising concerns over French political tensions and their potential spillover across the euro zone.

French President Emmanuel Macron declined Interior Minister Laurent Nunez's offer to resign following widespread weekend rioting, the Elysee presidential office said on Monday. The unrest added to investor concerns over political stability in the euro zone's second-largest economy.

However, analysts noted that the euro's reaction remained less severe than it had been at the beginning of October. According to Reuters, the single currency typically faces sustained pressure when French political uncertainty spreads beyond national borders and undermines confidence across the broader currency bloc.

French government bond yields have been a key indicator of these concerns. The spread between French 10-year government bonds, known as OATs, and German Bunds widened by around 40 basis points to above 150 basis points earlier this month, increasing risk premiums across other euro zone markets. The spread was last up 2 basis points at 141 basis points on Monday.

Dollar outlook shifts as AI investment concerns grow

Investors have also begun reassessing the US dollar's outlook after months of support from resilient American economic growth and equity market gains driven by the artificial intelligence boom.

According to Reuters, market participants are increasingly considering the possibility that AI-related spending could slow as the outlook for investment weakens. Such a shift could weigh on US economic growth and reduce borrowing requirements, potentially putting downward pressure on both the dollar and Treasury yields.

Interest-rate expectations have consequently returned to the forefront of currency markets. The Federal Reserve's September rate increase has reinforced perceptions that US policymakers remain committed to containing inflation.

The impact of higher energy prices on exchange rates will also depend on how central banks respond to the inflationary shock, analysts said.

Thu Lan Nguyen, head of foreign exchange and commodity research at Commerzbank, said the relative policy responses of the Federal Reserve and the European Central Bank were currently more important for the euro-dollar exchange rate than oil prices alone.

She added that the dollar could struggle to fully benefit from the inflationary impact of higher oil prices if markets do not expect the Fed to respond more aggressively.

Higher oil prices have generally supported the dollar while weighing on energy-importing currencies such as the euro and the Japanese yen since the conflict in Iran began in March.

Brent crude futures retreated from a five-month high but remained above $100 a barrel. European natural gas prices, meanwhile, climbed to a fresh four-year high of 89.13 euros.

Markets were pricing in an 87% probability that the Federal Reserve would leave interest rates unchanged this month, while expectations pointed to 75 basis points of rate cuts by the end of 2027. Expectations for the European Central Bank followed a broadly similar trajectory.

The US dollar index, which measures the greenback against a basket of major currencies, rose 0.26% to 102.05.

Yen steady as BOJ signals scope for rate hikes

The US dollar edged 0.05% higher against the Japanese yen to 158.15 yen on Monday as investors weighed the Bank of Japan's monetary policy outlook against concerns over Japan's public finances.

BOJ Governor Kazuo Ueda said underlying inflation was quite close to the central bank's 2% target, signalling that further interest-rate increases remained possible.

However, concerns over Prime Minister Sanae Takaichi's spending plans continued to weigh on sentiment, with investors worried that additional fiscal expansion could exacerbate Japan's already substantial debt burden.

Chinese yuan strengthens after GDP data

The offshore Chinese yuan strengthened against the dollar, with the greenback falling 0.05% to 6.6815 yuan. The dollar's decline took it to its weakest level against the offshore yuan since June 2022.

The move followed Chinese economic data released on Monday showing that gross domestic product grew slightly more than expected in the third quarter, providing support to the Chinese currency.

Indonesian rupiah extends losses

In Southeast Asia, the Indonesian rupiah extended its decline for a fourth consecutive session after global index provider MSCI threatened last week to downgrade Indonesia's equity market from its emerging-markets index to standalone status.

The warning triggered a sharp sell-off in Indonesian equities, with the market plunging 11.6% following the announcement.

The rupiah slipped 0.2% on Monday, trading near its weakest level in almost three months as investors assessed the implications of the potential index downgrade.

Elsewhere, the Australian dollar rose 0.4% to $0.6971, outperforming several other major currencies during the session.