By Amanda Cooper
LONDON (Reuters) -The euro rose slightly on Tuesday, regaining some balance as political unrest in France prompted traders to seek protection against further price swings, while the yuan hit a 13-month low on rate risks and weakness in the Chinese economy.
The yen, which has risen nearly 4.5% over the past two weeks, retreated somewhat against the dollar but remained near six-week highs as traders grew increasingly confident that Japan interest rate could increase this month.
The euro, which was the weakest G10 currency through November, started this month down 0.7% on Monday and last hovered at $1.0487 as the French government heads towards collapse over a budget impasse. [EUR/GVD]
French Prime Minister Michel Barnier faces a vote of no confidence on Wednesday after fierce opposition from across the political spectrum to his budget, which includes painful tax hikes and spending cuts aimed at repairing the country’s precarious finances.
Demand for hedges, as reflected by Euro options volatility, has reached the highest level since March 2023 this week, driven by the combination of a series of weak data, political uncertainty in the major Eurozone economies and the seemingly unstoppable dollar would battle the single European currency.
“There is so much against the euro at the moment… the list of headwinds is growing by the day,” said City Index market strategist Fiona Cincotta.
“Today you clearly have political instability in France, and even in Germany things are rumbling and there is a kind of unease because you have weak economic prospects,” she said.
Over the past month, the euro has lost 3% against the dollar and more than 1% against both the pound and the Swiss franc.
DOLLAR PEACE, FOR NOW
The dollar typically experiences seasonal weakness in December as companies tend to buy foreign currencies. However, traders are closely watching President-elect Donald Trump’s new administration this year and supporting the dollar.
Over the weekend, Trump threatened punitive tariffs unless BRICS member states committed to adopting the dollar as a reserve currency.
“The comments reinforce the view that Trump may not aim to weaken the dollar during his presidential term and will instead rely on tariffs to address the major imbalance in US goods trade,” said Rabobank strategist Jane Foley in a note.
“We remain of the view that the euro/dollar could fall to parity around the middle of next year. The timing could coincide with Trump introducing new tariffs.”
The Chinese yuan had already sold off in anticipation of new tariffs from Trump. Improving US manufacturing data and a plunge in Chinese bond yields to record lows have pushed the currency towards 7.3 per dollar for the first time since November last year. [CNY/]
China set the yuan’s trading range to its weakest level in more than a year and traders moved to sell the currency at 7.2996 per dollar. The price traded at 7.24 on Friday. [CNY/]
The Australian dollar rose 0.4% to $0.6503, reversing some of the 0.7% decline in the previous session. Economic data was mixed, with a larger-than-expected current account deficit offset by a jump in government spending that is likely to boost growth.
The yen, the only G10 currency to gain against the dollar last month, hit its strongest since late October at 149.09 against the dollar on Monday and was last at 149.89, leaving the dollar rose 0.2% that day.
Markets estimate a nearly 60% chance of a 25 basis point rate hike in Japan this month.
The key question for investors is what Friday’s US employment data will show and how likely it is that the Federal Reserve will cut interest rates again this month. At the moment the chance of a cut is about 70%.
The figures on vacancies will appear later on Tuesday.
(Additional reporting by Tom Westbrook in Singapore; Editing by Jacqueline Wong and Nicholas Yong, Kirsten Donovan)
