The euro is heading for a fifth straight weekly decline as France's budget deficit keeps investors wary of euro-area debt, even as the dollar's advance takes a pause near 18-month highs. Hawkish Federal Reserve minutes are underpinning the greenback, while the yen stays pinned near 158 per dollar despite a stronger-than-expected Japanese trade surplus.
Euro drifts near 17-month lows as French debt sell-off spreads
The euro is on course for a fifth consecutive weekly decline, dragged down by lingering anxiety over France's public finances even as the dollar's relentless climb takes a breather. Its slide has coincided with a broader sell-off in European sovereign debt that has unsettled currency desks all week.
The euro hovered near $1.1200, its lowest level since May, after dropping to that mark in earlier sessions. The move reflects a wider liquidation of French sovereign assets that has rippled across European debt and foreign-exchange markets this week.
French budget gap deepens the fiscal risk premium
France's budget deficit is projected to reach 5.4% of GDP, well above the European Union's 3% limit. Analysts at DBS said French fiscal headwinds remain the primary anchor on the euro, with international investors demanding a higher risk premium to hold eurozone exposure.
Bank of France Governor Emmanuel Moulin said Wednesday that France's fiscal position is serious, but that the remedy must come from domestic budget consolidation rather than European Central Bank intervention. As a result, the ongoing liquidation of French paper has pushed 10-year OAT yields toward 4.90% and widened the spread over German Bunds past 140 basis points, spilling over into Italian and Greek debt.
ECB meeting and hawkish Fed minutes back the dollar
The ECB is set to publish the account of its recent policy meeting, with traders watching how policymakers weigh rising energy inflation against widening sovereign bond spreads. ECB Chief Economist Philip Lane is scheduled to speak later Thursday, with markets watching for signals on whether tighter financial conditions reduce the need for further rate hikes.
Minutes from the Federal Reserve's September meeting showed a majority of officials still viewed inflation as the paramount threat to the outlook. The minutes reinforced expectations that the Fed will hold rates steady at its October 28 meeting before potentially delivering another 25-basis-point hike in December, and according to CME FedWatch data, money markets reflect an 81% probability of an October pause, with December-hike odds above 84%.
According to Brown Brothers Harriman's Elias Haddad: "The minutes suggest US financial conditions give the Fed room to keep hiking." Adding to the dollar's yield advantage, the New York Fed reported that one-year U.S. inflation expectations rose to a three-year high of 3.9% in September.
Yen stays pinned near 158 despite a stronger trade surplus
Japan's current-account surplus reached ¥4.062 trillion in August, beating the ¥3.19 trillion consensus forecast. Despite that trade buffer, the yen traded flat to slightly weaker around 158.17 per dollar, as Bank of Japan policymakers remain divided over the timing of their next rate hike.
Market concern over prospective fiscal spending packages in Tokyo, combined with 10-year U.S. Treasury yields holding above 5.30%, continues to favor the dollar in interest-rate differential plays. The U.S. Dollar Index held around 102.30, consolidating near 18-month peaks after a 0.3% gain on Wednesday.
Source: Investing.com
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