Karen Brettell
(Reuters) – The euro was on track for its biggest weekly fall against the dollar in two months on Friday amid concerns that a recent government will worsen France’s fiscal situation as early 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 their biggest weekly augment 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 the pressures on the budget that are already there,” said Brad Bechtel, global 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 that the eurozone’s second-largest economy would be at risk of a financial crisis if the far right or left prevails because of its stringent spending plans.
Marine Le Pen’s Eurosceptic National Rally (RN) is leading in the polls.
“At both ends of the French political spectrum, the parties campaigning are fiscally expansionist,” said Karl Schamotta, chief market strategist at Corpay in Toronto. “Markets are largely reacting to additional fiscal stress.”
The euro is on track for a weekly decline of 0.95% – its biggest since April – and was last down 0.34% on the day at $1.0699. It fell to $1.06678, the lowest level since May 1.
The euro’s weakness helped strengthen the dollar. The rate – which tracks the currency against six other currencies – rose 0.3% at 105.55 to hit 105.80, the highest since May 2.
“We are seeing bond flows into the United States on both ends of the spectrum – from the safe-haven side and from the yield-seeking side – given that U.S. yields remain well above yields available elsewhere,” Schamotta said.
The European Central Bank and the Bank of Canada have started cutting interest rates, while the Federal Reserve remains steady.
The U.S. central bank took a more hawkish tone than expected this week, with Fed officials projecting just one rate cut this year and pushing back the start of rate cuts perhaps as delayed as December.
But for now, “The Fed is kind of taking a backseat when it comes to the dollar,” Bechtel said. Instead, elections in emerging markets and Europe are driving change, he said.
Friday’s survey showed U.S. consumer sentiment deteriorated in June amid household concerns about inflation and incomes.
Other data showed U.S. import prices unexpectedly fell in May on lower prices for energy products, providing another boost to the domestic inflation outlook.
Lower-than-expected consumer price inflation in May this week boosted hopes that inflation will continue to fall toward the Fed’s 2% annual target and enable an interest rate cut as soon as September.
Chicago Fed President Austan Goolsbee said Friday he was “relieved” by the consumer inflation data, but added more progress was needed.
The yen fell after the BOJ’s decision to maintain interest rates and resume bond purchases.
To the surprise of markets, the BOJ said it would continue buying government bonds at its current pace for now and would present details of its emissions-cutting plan at its July policy meeting.
BOJ Governor Kazuo Ueda said the central bank is “paying close attention” to the impact of the faint yen on inflation, adding that an interest rate hike in July is possible depending on economic data.
The dollar was last up 0.17% at 157.29, after previously hitting 158.26, the highest since April 29.
The yen’s fall to a 34-year low of 160.245 per dollar in delayed April triggered several rounds of official Japanese intervention totaling 9.79 trillion yen ($62 billion).
In cryptocurrencies, bitcoin fell 1.84% to $65,453.
