Euro set for biggest weekly fall in months vs dollar as France fiscal trajectory weighs

By Stefano Rebaudo

Oct 2 (Reuters) - The euro was set for a fourth straight weekly fall against the dollar, its steepest in around four months, as concerns about France's fiscal trajectory and the Federal Reserve's hawkish shift in mid-September weighed on sentiment.

After sliding on Thursday, the single currency was up on Friday as oil prices dropped amid mixed supply signals. 

The dollar often draws support from higher oil prices, as investors cut exposure to currencies of major energy importers such as the euro and yen, which are seen as more vulnerable to a rise in crude costs.

The dollar index, which measures the US currency against six rivals, was down 0.15% at 101.90, set for a 0.85% gain this week, its third consecutive weekly rise, a run it last had in May 2025.  

The US central bank raised rates and signalled more hikes in mid-September, with Chair Kevin Warsh reaffirming the Fed's independence despite repeated calls from US President Donald Trump for lower borrowing costs, leading markets to firm bets on further tightening.

The single currency rose 0.15% to $1.126, but was on track for a 1.17% weekly fall, the biggest since early June.

“Layered on top of worries about low European gas storage, already high energy prices, persistent competition from China, a weakened chancellor in Germany and the risk of hybrid attacks from Russia, the outlook for the euro is clearly on a weakened footing relative to last year,” said Jane Foley, senior forex strategist at Rabobank, after flagging that France’s budget and political backdrop have weighed on the currency.

French and Italian government bonds have come under selling pressure in recent weeks amid expectations for rising policy rates and growing political risk as 2027 elections loom, with French 10-year yields jumping to their highest level since 2002 on Thursday. 

The yield gap between French bonds and safe-haven Bunds – a market gauge of the risk premium that investors demand to hold French debt – widened to about 150 basis points on Friday, the highest level since the euro area's sovereign debt crisis in 2011.

The sell-off showed signs of spreading to debt-laden countries such as Italy and Greece, despite their improved fiscal trajectories.

"The prospect that either a populist far-right or populist far-left government could take over in France means that the path to fiscal adjustment could be much more difficult than otherwise," Thierry Wizman, global forex and rates strategist at Macquarie Group, said.

"Moreover, the presidential campaigns have barely begun, meaning that the associated rhetoric around debt, default, budgetary politics, et cetera, is likely to get louder," he added, after warning of a further negative impact on the euro soon.

ATTENTION SWITCHES TO US PAYROLLS 

Investor focus will be on the US payroll report due later in the day, with data expected to show that job growth slowed in September. The unemployment rate is forecast to have been 4.1% for a third straight month.

The report comes after data on Wednesday showed US consumer prices rose less than expected in August, along with downward revisions to July's figure, leading traders to rein in wagers of a rate hike from the Federal Reserve later this month.

Two of the Fed’s top policymakers this week staked out an unusually clear case for taking in more data before deciding about another hike. 

Traders are pricing in a 72% chance of the Fed standing pat in October, compared with 36% a week earlier, the CME FedWatch tool showed. They still expect a rate hike by the end of the year.    

(Reporting by Stefano rebaudo; additional reporting by Ankur Banerjee in Singapore; Editing by Lincoln Feast, Jamie Freed and Alex Richardson)