Euro falls, set for fifth straight weekly drop as oil prices rise

By Chuck Mikolajczak

NEW YORK, Oct 9 (Reuters) - The euro was poised for a fifth straight weekly drop on Friday, with early gains fading as oil prices erased earlier declines, but recent selling pressure was muted as France's beleaguered bond market steadied.

The euro zone's currency hit a 17-month low of $1.1161 on Monday as investors worried about France's record public debt and the difficult political path to budget cuts, in contrast with a robust-looking US economy and currency.

The dollar index, which measures the greenback against a basket of currencies, rose 0.13% to 102.25. The index was up about 0.3% on the week and on track for a fourth straight weekly gain, its longest run since May 2025.

The euro was last down 0.1% at $1.1198, and off about 0.5% on the week as it was poised for its longest streak of weekly declines against the dollar since the start of 2025.

Risk premiums on French and Italian government debt were on track for a weekly decline after jumping in late September, as investors looked for fresh developments before demanding higher compensation for fiscal and political risks.

TRUMP SIGNALS NO IRAN ATTACK

Global bond markets had calmed earlier on Friday as oil prices fell after US President Donald Trump said that the US would not attack Iran before US midterm elections on November 3 and added that there had been productive talks with Tehran over the war.

"As it stands right now, you have a confluence of factors — you have higher oil prices, you have the issue in France, so it is really tough to say what is moving the market more than the other," said Eugene Epstein, head of trading and structured products at Moneycorp in Stamford, Connecticut.

"But practically speaking, I'd say today is in a relative holding pattern, everyone is just waiting for all the Fed speak to make its way through, because certainly you can see that the sensitivity of the dollar is high to the entire range of Fed speakers now," Epstein said.

Crude prices moved off their lows, however, as British navy-affiliated agency UKMTO said a vessel was struck by an unknown projectile 13 nautical miles west of Al Jazeera in the United Arab Emirates.

US crude rose 0.6% to $92.04 a barrel after falling as low as $90.01 and Brent advanced to $104.88 per barrel, up 0.58% on the day, after declining to $102.33.

Bond yields around the world have climbed in recent weeks due to expectations of central bank rate hikes as well as concerns about government finances.

CENTRAL BANK POLICY IN FOCUS

But expectations for a rate hike from the Fed at its policy meeting later this month remain subdued, with markets pricing in a 19.4% chance for a rate hike of at least 25 basis points, according to CME FedWatch, even as recent economic data has pointed to persistent inflation pressure. However, investors are pricing in an 85.8% chance for a hike at the central bank's December meeting.

On Friday, the University of Michigan's Surveys of Consumers showed US consumer sentiment slumped further in early October as the rising cost of living because of the Middle East conflict soured households' views of the economy.

While many Fed officials have indicated more rate hikes will be needed to curb inflation, others have pushed back on the need for immediate hikes, and suggested the Fed should be patient and flexible in deciding the rate path.

French debt has been under pressure as politicians struggle to curb the budget deficit ahead of a divisive election in 2027. The calling of a snap election in Spain earlier in the week also added to the pressure on the euro.

Sterling gained 0.08% to $1.3235 but was on track for a seventh straight week of declines, its longest stretch since November 2024.

Against the yen, the dollar strengthened 0.25% to 158.25. The Japanese currency was on pace for its fourth straight weekly decline against the greenback, down about 0.2% on the week.

(Reporting by Chuck Mikolajczak; Additional reporting by Tom Westbrook in Singapore and Harry Robertson in London; Editing by Elaine Hardcastle, Kevin Liffey, Emelia Sithole-Matarise and Andrea Ricci )