June 14 (Reuters) – The euro was on track for its
biggest weekly fall against the dollar in two months on Friday
on concerns that a new government will worsen France’s fiscal
situation as a snap parliamentary election approaches.
The yen hit a six-week low against the dollar, before
rebounding, after the Bank of Japan (BOJ) surprised markets with
a dovish monetary policy update.
French markets saw the biggest weekly jump since 2011 in the
premium that investors demand to hold French government debt and
bank stocks tumbled on Friday.
The concern is “the instability combined with the already
existing pressure on the budget,” said Brad Bechtel, global head
of FX at Jefferies in New York, adding that “any time spreads
widen in Europe, the euro suffers.”
French Finance Minister Bruno Le Maire said on Friday that
the euro zone’s second-biggest economy was at risk of a
financial crisis if either the far right or left won because of
their heavy spending plans.
Marine Le Pen’s eurosceptic National Rally (RN) is leading
in opinion polls.
“On both ends of the French political spectrum, the parties
that are campaigning are fiscally expansionist parties,”
said Karl Schamotta, chief market strategist at Corpay in
Toronto. “Markets are mostly responding to additional fiscal
stress.”
The euro is on track for a 0.95% weekly fall – its
biggest since April – and was last down 0.34% on the day at
$1.0699. It got as low as $1.06678, the lowest since May 1.
The euro’s weakness has helped drive the dollar higher. The
dollar index – which tracks the currency against six
peers – was up 0.3% at 105.55 and reached 105.80, the highest
since May 2.
“We’re seeing flows into the U.S. on both ends of the
spectrum – from the safe-haven side as well as on the
yield-seeking side – given that U.S. yields remain well above
those available elsewhere,” said Schamotta.
The European Central Bank and Bank of Canada have begun
cutting rates while the Federal Reserve holds steady.
The U.S. central bank adopted a more hawkish than expected
tone at this week’s meeting when Fed officials projected only
one rate cut this year and pushed out the start of rate cuts to
perhaps as late as December.
But for now, “the Fed is sort of taking a backseat when it
comes to the dollar,” Bechtel said. Elections in emerging
markets and Europe are instead driving moves, he said.
A survey on Friday showed that U.S. consumer sentiment
deteriorated in June as households worried about inflation and
incomes.
Other data showed that U.S. import prices
unexpectedly fell
in May amid lower prices for energy products, providing
another boost to the domestic inflation outlook.
Softer than expected
consumer
and
producer
price inflation for May this week has helped bolster hopes
that inflation will continue to ease closer to the Fed’s 2%
annual target and make an interest rate cut possible as soon as
September.
Chicago Fed President Austan Goolsbee on Friday said he
felt
“relief”
after the consumer inflation data, but added there needs to
be more progress.
The yen fell after the BOJ’s decision to hold interest rates
and restart bond buying.
In a surprise for markets, the BOJ said it would continue to
buy government bonds at the current pace for now and lay out
details of its tapering plan at its July policy meeting.
BOJ governor Kazuo Ueda said the central bank was “paying
close attention” to the impact of the weak yen on inflation, and
added that a rate hike in July was a possibility, depending on
economic data.
The dollar was last up 0.17% at 157.29, after
earlier reaching 158.26, the highest since April 29.
The yen’s decline to a 34-year low of 160.245 per dollar at
the end of April triggered several rounds of official Japanese
intervention totaling 9.79 trillion yen ($62 billion).
In cryptocurrencies, bitcoin fell 1.84% to $65,453.
(Reporting By Karen Brettell; Editing by Kevin Liffey, Andrew
Heavens and Nick Zieminski)
