Euro Normalizes Amid French Instability Concerns

The euro rose on Tuesday, recovering some ground after political turmoil in France prompted traders to hedge against further price volatility. Meanwhile, the Chinese yuan dropped to a 13-month low due to tariff risks and economic weakness in China.

The yen, which gained approximately 4.5% over the past two weeks, retreated slightly against the dollar but remained near six-week highs as optimism grew among traders that Japan may raise interest rates in December.

The euro, the weakest G10 currency last month, fell 0.7% on Monday to 1.0487 as France’s government faced the threat of collapse due to a budget impasse.

French Political Turmoil Pressures the Euro

French Prime Minister Michel Barnier faces a no-confidence vote on Wednesday amid widespread opposition to his budget proposal, which includes steep tax hikes and spending cuts intended to stabilize France’s precarious finances.

Hedging demand, reflected in euro option volatility, reached its highest level since March 2023 this week. Coupled with weak economic data, political instability in one of the eurozone’s key economies, and a strengthening U.S. dollar, the euro remains under pressure.

Over the past month, the euro has lost 3% against the dollar, over 1% against the pound, and more than 1% against the Swiss franc.

Dollar Stable, but Risks Loom

The dollar traditionally faces seasonal weakness in December as corporations shift into other currencies. However, traders are treading cautiously this year due to the upcoming Donald Trump administration and its dollar-supportive policies.

Over the weekend, Trump issued warnings of punitive tariffs unless BRICS countries commit to using the dollar as a reserve currency.

The Chinese yuan had already experienced significant selling in anticipation of further tariffs from Trump. Combined with improved U.S. manufacturing data and falling Chinese bond yields, the yuan dropped to 7.2996 against the dollar, its lowest trading range in nearly a year.

Yen Retains Strength

The yen, the only G10 currency to gain against the dollar last month, climbed to its highest level since late October at 149.09 per dollar on Monday and was last trading at 149.89, up 0.2% on the day.

Market estimates place the probability of Japan raising interest rates by 25 basis points in December at around 60%, contributing to the yen’s strength.

U.S. Employment Data in Focus

The most pressing question for investors remains Friday’s U.S. employment report and how it might influence the Federal Reserve’s rate-cut decisions. Current market estimates place the probability of a December rate cut at approximately 70%, adding to the uncertainty surrounding the dollar’s trajectory.