Karen Brettell
(Reuters) – The euro was on track for its biggest weekly fall against the dollar in two months on Friday on concerns the new government will worsen France’s fiscal situation as snap parliamentary elections approach.
The yen hit a six-week low against the dollar before rebounding after the Bank of Japan (BOJ) surprised markets with a dovish monetary policy update.
French markets saw the biggest weekly jump since 2011 in the premium investors demand to hold French government debt, and bank shares fell on Friday.
The concern is “the instability coupled with pre-existing fiscal pressures,” said Brad Bechtel, head of FX at Jefferies in New York, adding that “every time spreads widen in Europe, the euro suffers.”
French Finance Minister Bruno Le Maire said on Friday the eurozone’s second-largest economy is at risk of a financial crisis if the far right or left win over their big spending plans.
Marine Le Pen’s Eurosceptic National Rally (RN) party is leading in opinion polls.
“At both ends of the French political spectrum, the parties leading the campaign are the parties engaged in financial expansion,” said Carl Chamotta, chief market strategist at Corpay in Toronto. “Markets are largely reacting to additional fiscal stress.”
The euro is on track for a 0.95% weekly fall – its biggest since April – and was last down 0.34% on the day at $1.0699. It fell to $1.06678, its lowest level since May 1.
The euro’s weakness contributed to the dollar’s rise. The index, which tracks the currency against six peers, rose 0.3% to 105.55 and hit 105.80, its highest level since May 2.
“We are seeing inflows into the U.S. at both ends of the spectrum—both from the safe harbor side and the yield-seeking side—given that U.S. yields remain significantly higher than other countries,” Sciamotta said.
The European Central Bank and Bank of Canada have begun cutting rates, while the Federal Reserve remains stable.
The US central bank took a more aggressive tone than expected at its meeting this week, with Fed officials forecasting only one rate cut this year and delaying the start of rate cuts, possibly until December.
But for now, “the Fed is taking a backseat when it comes to the dollar,” Bechtel said. Instead, elections in emerging markets and Europe are driving the movement, he said.
A survey on Friday showed U.S. consumer sentiment worsened in June as households worried about inflation and incomes.
Other data showed U.S. import prices fell unexpectedly in May as lower energy prices provided further boost to the domestic inflation outlook.
Softer-than-expected consumer and producer price inflation in May this week helped bolster hopes that inflation will continue to fall closer to the Fed’s annual 2% target and make it possible to cut interest rates as early as September.
Chicago Fed President Austan Goolsbee said Friday he was “relieved” by the consumer inflation data but said more progress needs to be made.
The yen fell after the Bank of Japan decided to maintain interest rates and resume bond purchases.
To the surprise of markets, the Bank of Japan said it will continue to buy government bonds at the current pace and will lay out details of its plan to cut rates at its July policy meeting.
Bank of Japan Governor Kazuo Ueda said the central bank was “paying close attention” to the impact of a weak yen on inflation, and added that a rate hike in July was possible, depending on economic data.
The dollar was last up 0.17% at 157.29, after earlier hitting 158.26, its highest level since April 29.
The yen’s fall to a 34-year low of 160.245 per dollar in late April triggered several rounds of official Japanese intervention totaling 9.79 trillion yen ($62 billion).
In cryptocurrencies, Bitcoin fell 1.84% to $65,453.