**Euro Declines as Political Turmoil in France Weighs on the Currency, While the U.S. Dollar Gains Strength**

The euro experienced a notable decline on Monday, losing ground against a strengthening U.S. dollar primarily due to escalating concerns surrounding potential political instability in France. This situation poses risks to the country’s plans for addressing its growing budget deficit.

Investors are increasingly wary, as evidenced by a rise in the risk premium attached to French debt compared to benchmark German bonds. This shift came after Jordan Bardella, president of the far-right National Rally (RN) party, indicated that a no-confidence motion against the government could be on the horizon unless significant concessions are made. Leading RN figure, Marine Le Pen, has set a deadline for Prime Minister Michel Barnier to meet her party’s budgetary demands, intensifying the uncertainty.

The euro fell by 0.65%, trading at $1.0506, as market participants adjusted for the potential ramifications of a no-confidence vote expected on Wednesday. Chris Turner, head of forex strategy at ING, commented on the implications of French political developments, suggesting that while a government collapse may not materialize, the euro may remain under pressure in the short term.

Reflecting these concerns, the yield spread between French and German 10-year government bonds widened by 5 basis points to 85 basis points, after reaching a recent high of 90 basis points. This level was last observed during the euro area’s sovereign debt crisis in 2012, indicating rising anxiety among investors regarding French fiscal stability.

In contrast, the U.S. dollar demonstrated strength, buoyed by economic signals from the U.S. administration. The dollar index rose 0.6% to 106.39, rebounding after its first weekly decline since September as former President Donald Trump emphasized the need for BRICS nations to commit to not undermining the dollar, threatening tariffs should they do so.

Economists maintain that the U.S. dollar’s ascent may continue, given ongoing robust economic performance in the U.S. compared to a deteriorating outlook elsewhere. Jonas Goltermann, deputy chief markets economist at Capital Economics, noted that while interest rates in the U.S. may not shift dramatically in the immediate term, the dollar is likely to consolidate at current levels with potential for gains in 2025. The upcoming November payrolls report will be a crucial indicator, with expectations for job additions around 195,000 and a slight increase in the unemployment rate to 4.2%.

Forex traders should monitor the Federal Reserve’s trajectory, especially with key Fed officials, including Chair Jerome Powell, scheduled to speak this week. Market pricing suggests a 65% chance of a 25 basis point cut from the Federal Reserve in December, with limited additional cuts expected in 2025.

In the Asian markets, the Japanese yen experienced a modest rebound against the dollar, shifting by 0.3% to 150.18. This came after a rough week for the yen, which saw a 3.3% drop in value, attributed to improving economic data, including an increase in business investment at an annualized rate of 8.1% in Q3.

Bank of Japan Governor Kazuo Ueda indicated the possibility of nearer interest rate hikes, provided the economic indicators continue to align favorably. Analysts anticipate that any uptick in labor earnings data could support further monetary tightening, with traders pricing a 63% chance of a quarter-point hike at the upcoming policy meeting on December 18-19.

In summary, forex traders should be vigilant regarding the unfolding political developments in France as they may directly impact the euro. Concurrently, the continuing strength of the U.S. dollar, bolstered by economic fundamentals, presents opportunities for traders as they navigate this dynamic landscape ahead of critical economic releases and central bank meetings.

Image from Pool/AP via Free Malaysia Today, licensed under CC BY 4.0.