EUR/USD dropped to a fresh 17-month low on Wednesday as renewed stress in French government bonds and a firmer dollar weighed on the euro. Sterling and the Japanese yen also eased against the greenback, with traders now turning to the Federal Reserve's September meeting minutes for the next move.
EUR/USD dropped 0.56% to $1.1197 on Wednesday. The pair remained trapped near its 17-month low. The euro had been trading around $1.1236 earlier in the session, but the Euro flipped from the strongest to the weakest of the eight major currencies within 24 hours as relief from a brief bond rally faded.
French Bond Stress Returns
The reversal traces back to France. The French 10-year yield rose to around 4.864%, up roughly 7.8bp on the day. The OAT-Bund spread widened back toward 137bp from around 130bp at Tuesday's close. France's budget deficit stood at 5.1% of GDP last year, with public debt at 119% of GDP by the end of June.
UBS Chief Executive Sergio Ermotti told CNBC's Squawk on the Street that "Incremental small changes are not going to be enough to resolve the big debt pile." Higher French yields are being read as a risk premium rather than a rate advantage, which is why French borrowing costs can climb while the euro still falls.
Dollar Firms as Oil Jumps
The dollar found support elsewhere. The U.S. Dollar Index climbed 0.3% to 102.15, while benchmark 10-year Treasury yields rose three basis points to 5.31%. Brent crude surged past $101.50 a barrel after intensified strikes on shipping in the Strait of Hormuz, having briefly dipped below $100 on Tuesday before recovering.
Pound and Euro Cross Also Under Pressure
Sterling was not spared, falling 0.29% to $1.3239 against the firmer dollar. The euro meanwhile slipped 0.27% to 0.8459 against the pound, touching a low of 0.8448 — its weakest level in 16 months.
Far-right candidate Marine Le Pen urged the ECB to intervene to curb debt costs and pledged to cut the deficit to 3.7% of GDP, but ING argued her pledge is not enough to drive a material recovery in French bonds. Spanish Prime Minister Pedro Sánchez's call for snap elections added regional risk.
FOMC Minutes Next Test
Markets now turn to the Fed's September FOMC minutes, due later Wednesday. Softer hiring data has lowered the probability of an October Fed rate hike to 20.5%, down from 51% a week earlier, while money markets still price an 84.5% likelihood of a December rate increase.
Sources: ActionForex, Investing.com, Investing.com
Trading involves risk.
Risk Disclaimer
