The euro traded near a 17-month low against the dollar as investors worried over France's public debt. Banque de France governor Emmanuel Moulin warned the country risks being strangled by rising rates without budget action, while a snap election in Spain added to regional uncertainty.
The euro traded near a 17-month low against the dollar on Tuesday, down 0.13% to $1.1206, as investors worried about France's public finances. The currency has extended last week's 1.2% drop and is down more than 4% this year.
French Bond Spreads Ease After Last Week's Sell-Off
The spread between French and German 10-year government bond yields climbed to its highest level since 2011 last week amid fiscal and political concerns in Paris. But Mohit Kumar, chief European economist at Jefferies, said the spread tightened from an intraday high of more than 150 basis points to 136 basis points over the past two trading sessions. He said the bank does not believe the eurozone is in a sovereign crisis, though he warned a further move above 150 basis points could risk spreading pressure to other French names and European peripheral markets.
Moulin Warns of Being "Strangled" by Rates
According to the Financial Times, Moulin warned that France risks being strangled by rising interest rates unless it curbs its deficit: "there is indeed a risk of being gradually strangled by rising interest rates". He said markets could be reassured if the government passes its proposed budget, including EUR 43bn in spending cuts and tax increases, to narrow the deficit.
Spain Adds to Political Uncertainty
In Spain, Prime Minister Pedro Sánchez has called a snap election for 29 November, with polls suggesting the centre-right People's Party could win and potentially govern with the far-right Vox party. Danske Markets analysts said they do not expect a near-term impact on growth or public finances, supported by strong employment and consumption, though tighter immigration policy could weigh on medium-term potential growth.
EUR/USD stabilised above the 1.12 level as pressure on France eased, while markets also scaled back expectations for further ECB rate hikes.
Sources: Business | The Guardian, ActionForex
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