Euro drops amid high energy prices and street riots in France

By Stefano Rebaudo

Oct 19 (Reuters) - The euro fell on Monday as high energy prices compounded concerns over political stability in France, where weekend riots and looting amounted to some of the country's worst unrest in years.

French Prime Minister Sebastien Lecornu said on Monday he had asked some local municipalities to impose partial curfews.

Analysts said the euro's reaction in early October was much more dramatic and followed a familiar playbook: The single currency tends to come under sustained pressure only if French political tensions spill beyond national borders and weigh on sentiment across the euro zone. 

The euro dropped 0.20% to $1.1218. It fell more than 1% at the turn of the month after the spread between French OATs and safe-haven German Bunds widened by about 40 basis points to above 150 bps within days, increasing risk premiums of other countries of the bloc. The French spread was last up 2 bps at 144 bps on Monday.

Analysts argued that investors reassessed their narrative about the forex market last week after robust US economic growth and equity market gains driven by the AI boom had supported the greenback for months.

They are increasingly focused on the risk that AI-driven spending could slow down due to a weaker outlook for investment in the sector, which would likely weigh on US growth while reducing borrowing needs — a combination that could drag both the dollar and Treasury yields lower.

The interest-rate outlook returned as a main market driver, also helped by the Fed's September rate hike which reassured investors that US policymakers remained committed to tackling inflation.

“For the euro/dollar, it is currently less the oil price itself that matters than how the Fed and ECB respond to it,” Thu Lan Nguyen, head of forex and commodity research at Commerzbank, said.

“As long as markets do not expect the Fed to react much more forcefully to the inflationary shock, the dollar will struggle to fully capitalize on the fundamental advantage provided by higher oil prices,” she added. 

Since the conflict in Iran erupted in March, higher oil prices have supported the dollar while weighing on energy-importing currencies such as the euro and yen. Brent crude futures slipped from a five-month high but were still above $100. Natural gas prices hit a fresh four-year high at €89.74.

Markets see an 85% chance that the Fed will keep rates unchanged this month, while pricing in 75 basis points of easing by the end of 2027. Expectations for the European Central Bank have followed a similar trajectory.

The US dollar index rose 0.10% to 101.87.

YEN ROUGHLY UNCHANGED WITH RATES, FISCAL SPENDING IN FOCUS

Against the yen, the US dollar was up 0.12% at 158.20 as Bank of Japan Governor Kazuo Ueda signalled on Monday there was scope for further tightening moves. Ueda also said raising rates at an appropriate pace would help avoid spikes in bond yields.

However, concerns that Prime Minister Sanae Takaichi's spending plans could exacerbate Japan's already heavy debt burden continued to weigh on sentiment.

"The BoJ may be pressured by the bond and currency markets to normalise at a faster pace, while the government is likely to remain under pressure to identify clear funding sources for its expansionary ambitions," Naomi Fink, chief global strategist at Amova Asset Management, said.

Against the Chinese yuan, the US dollar was down 0.05% at 6.6815 in offshore trading, the greenback's weakest level since June 2022, after data released on Monday showed China's gross domestic product for the third quarter grew slightly more than expected. 

The Australian dollar appreciated 0.64% to $0.6988.

(Reporting by Stefano Rebaudo; Editing by Thomas Derpinghaus, William Maclean and Hugh Lawson)