Dollar Rallies, Euro Falls Ahead of France’s No-Confidence Vote

The U.S. dollar rose on Wednesday, while the euro retreated ahead of a no-confidence vote in France later in the day, which could topple the fragile coalition government. The Dollar Index, which tracks the greenback against a basket of six other currencies, was up 0.1% at 106.465.

Dollar Continues to Attract Attention

The dollar remained in demand on Wednesday, driven by its status as a safe-haven asset amid political turmoil in South Korea and Europe, as well as ongoing conflicts in Ukraine and the Middle East.

“A lame government in Germany and potentially also in France today, if a no-confidence motion succeeds, plus this news from Korea, will only add to the confidence that relatively high rates and liquidity make the dollar the most compelling currency in which to park cash balances at this time,” ING analysts said in a note.

Economic data will also be in focus, with the ADP private payrolls report for November expected later in the session. This report is especially significant ahead of Friday’s monthly employment report, which remains the centerpiece for markets.

Other events on the agenda include the services ISM report and a speech by Fed Chairman Jerome Powell in Washington.

“There is a risk that U.S. macro data softens a bit and could drag the dollar down a bit more, but taking defensive positions in something like the Japanese yen or Swiss franc can be expensive,” ING added.

Market-implied odds of a quarter-point rate cut on December 18 stood at 75%, according to CME’s FedWatch tool.

Euro Under Pressure Amid French Political Crisis

In Europe, the EUR/USD slipped 0.1% to 1.0501, with the euro struggling for support as the political crisis in France reached its boiling point.

French lawmakers are expected to vote on no-confidence motions, likely to topple Prime Minister Michel Barnier’s government. Opposition parties have shown little willingness to support Barnier’s budget, which aims to tackle the country’s ballooning deficit.

Adding to the euro’s woes, data released Wednesday showed a sharp decline in eurozone business activity last month. The final composite Purchasing Managers’ Index (PMI), a key indicator of overall economic health, fell to 48.3 in November, down from 50.0 in October.

“Whether it’s European political risk, weak activity, the threat of trade wars, or rising energy prices (EU gas inventories are starting to come under pressure), there are plenty of reasons to underweight the euro,” ING noted.

GBP/USD Benefits from UK Data

The GBP/USD pair rose 0.1% to 1.2677, buoyed by UK activity data that remained in expansionary territory.

Bank of England Governor Andrew Bailey, in an interview published Wednesday, reaffirmed that gradual interest rate cuts are likely next year. Bailey also noted that the process of falling inflation is well underway.

“There’s still some way to go, because even though inflation came down to target over the summer, we’ve been saying for a while that … we were probably going to move back a little bit above target,” Bailey remarked.

South Korean Won Stabilizes Amid Political Turmoil

In Asian markets, the USD/KRW pair stabilized at 1,414.26, after spiking to 1,444.05 won overnight, marking its highest level since November 2022.

South Korean President Yoon Suk-Yeol declared martial law on Tuesday to counter “anti-state forces” among his political opponents. However, the measure was swiftly rejected by parliament and public protests, forcing its revocation within hours.

The won trimmed early losses as South Korea’s central bank convened an emergency meeting to stabilize domestic markets.

Other Currency Movements

AUD/USD fell 1% to 0.6421, its lowest level since early August, after third-quarter GDP data showed the Australian economy grew below forecasts, prompting increased bets that the Reserve Bank of Australia will cut interest rates in early 2025.

USD/JPY rose 0.7% to 150.68.

USD/CNY fell 0.2% to 7.2730, with the Chinese yuan recovering from Tuesday’s low of 7.3145, its weakest level since November last year. The rebound was supported by a stronger-than-expected central bank midpoint fixing.