Dollar struggles to find direction, euro near 1-1/2 month lows

Dollar struggles to find direction, euro near 1-1/2 month lows
Dollar struggles to find direction, euro near 1-1/2 month lows

The dollar struggled for direction on Wednesday, while the euro held near recent lows on concerns that a new government in France could weaken fiscal discipline, increasing the debt risk premium across the euro zone. .

Meanwhile, sterling rose after news that British services inflation was higher than expected.

US markets remain closed on Wednesday, which will likely result in muted trading throughout the day.

The dollar fell overnight as US retail sales suggested economic activity remained lackluster and the Federal Reserve will cut rates sooner than expected.

The euro was last up 0.1% at $1.0753; Friday marked a one-and-a-half-month low of $1.07.

The yield gap between French and German public debt, now seen as an indicator of the risks of a budget crisis in the heart of Europe, narrowed slightly since Monday but remained close to its seven-year highs reached. last week.

Analysts noted that the single currency was far from putting a price on any serious threat to the euro zone bloc’s financial stability.

“The very limited movement of currencies, in contrast to the movement of OAT (French public debt yield) spreads, underlines the fact that the reaction has more to do with a reassessment of fixed income risks “said Derek Halpenny, head of global market research at MUFG.

National Rally (RN) leader Marine Le Pen said she sought cohabitation with President Emmanuel Macron and would be respectful of institutions, triggering expectations that the RN could backtrack on its fiscally costly promises. if he won the elections at the beginning of July.

The European Central Bank could also buy French bonds to prevent an “unjustified and disorderly” widening of yield spreads. Still, ECB chief economist Philip Lane said the recent market turmoil was “not disorderly.”

The European Commission on Wednesday proposed widely expected disciplinary measures against France, Italy and five other European Union countries for running excessive budget deficits.

The dollar index was flat at 105.27.

According to CME’s FedWatch tool, markets are now pricing in a 65% chance that the Federal Reserve will begin easing rates in September, with cuts of nearly 50 basis points expected this year.

Sterling rose 0.10% against the euro to 84.41 pence per euro and 0.20% against the dollar to $1.2732 after British data showed that underlying pressures on Prices remained strong.

“What matters now is how much value the Monetary Policy Committee places on timely and possibly retrospective data,” said Sanjay Raja, chief UK economist at Deutsche Bank Research, recalling that survey numbers have been “more encouraging.”

Markets priced the chance of a Bank of England rate cut in August at around 25%, up from 50% before the data, and monetary easing in 2024 at 44 basis points, up from almost half a percentage point. before the figures.

The Bank of England holds its monetary policy meeting on Thursday.

The Swiss franc hit a seven-month high against the euro at 0.9475, and was down 0.1% at 0.9503.

The single currency has steadily weakened against the Swiss currency since late May, when it hit 0.9930 per franc, its highest level since April 2023.

“Some observers see this as a renewed threat of intervention or as an implicit put that (Swiss National Bank President Thomas) Jordan is offering to all market participants holding long positions in Swiss francs, especially against the euro,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank, recalling a speech by Jordan at the end of May.

Jordan argued that inflation risks would likely be associated with a weaker Swiss franc, which the SNB “could offset by selling currencies.”

BofA expects the SNB to implement its second 25 basis point cut next week and to express its willingness to “be active in the currency market as necessary.”

The Australian dollar rose 0.04% to 0.667 against the US currency, also helped by a hawkish message from Reserve Bank of Australia Governor Michele Bullock following the central bank’s rate decision on Tuesday .

The yen was little changed at 157.93 per dollar, as it remains pressured by the sharp differences in interest rates between Japan and the United States, in particular.

Analysts said monetary tightening by the Bank of Japan was on the horizon but the BOJ would take a slow approach.

 
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