Euro firms against dollar, yen ahead of central bank meetings

By Stefano Rebaudo

Oct 26 (Reuters) - The euro edged higher on Monday as oil prices dropped and after Moody’s left France's credit rating unchanged on Friday, with investors staying on the sidelines ahead of a week packed with central bank meetings.

The euro ended last week lower against the US dollar and the yen as a selloff in French government bonds drove the country's debt risk premium to its highest level since the 2011 sovereign debt crisis, reigniting concerns about renewed financial stress across the euro zone.

However, French government bond (OAT) prices rose on Monday after Moody's spared France a credit rating downgrade last week, easing pressure on a government struggling to shore up strained finances.

Brent crude futures eased after a Reuters report that Qatari mediators were in Tehran on Sunday as part of an effort to de-escalate regional tensions in coordination with the US, having surged to a six-month high last week. Higher oil prices weigh on import-dependent economies such as the euro zone and Japan.

The euro rose 0.10% to $1.1228 and 0.25% to 176.15 versus the yen.

According to Barclays' strategists, "French stress is unlikely to go away ahead of the presidential election in April/May, and while the euro/dollar premium has now corrected to sub-3%, there is likely still some more unwind in store."

France is bracing for more trouble this coming weekend related to student protests and broader anti-government demonstrations, said Interior Minister Laurent Nunez. 

Last week, the US dollar came under selling pressure during a tech-led market selloff.

Corporate earnings reports from large cloud computing providers Alphabet, Microsoft and Amazon will also test the fragile AI-led market rally and broader risk appetite.

The dollar index, which measures the US currency against a basket of peers, was little changed at 101.80. 

CENTRAL BANKS IN FOCUS

Five major central banks will announce policy decisions later in the week. The US Federal Reserve, the European Central Bank and the Bank of Japan are all expected to hold rates steady despite inflation pressures, while leaving the door ajar for December hikes.

The Japanese yen fell 0.20% to 157.18 per dollar.  

Investors will focus on any clues about the rate outlook, as a potential AI-driven selloff in US stocks could tilt the Fed towards a more dovish stance.

According to Citi economists, a sustained selloff in equities could mean that September’s 25-basis-point hike turns out to be both the first and last hike of the cycle. 

In the euro zone, France will be the hot topic, with markets watching whether renewed fiscal concerns begin to influence expectations for future ECB policy.

"The ECB would prefer to not talk about France this week, but it’s impossible to avoid," Jamie Searle, European rates strategist at Citi, said.

"Unanchored OAT valuations likely mean careful words, a reminder of conditional backstops, but no plans for direct intervention especially as it might not work," he added.

New Zealand and Canada's central banks are expected to raise rates this week.

The Australian dollar was flat at $0.7030 and New Zealand's kiwi was down at $0.5700. 

REAL EXPECTED TO FALL SHARPLY

The Brazilian real was set to fall sharply against the US dollar after Brazilian President Luiz Inacio Lula da Silva, an icon of the global left, won a historic fourth term on Sunday. However, his opponent Senator Flavio Bolsonaro said he would ask for the result to be annulled. 

"The fiscal side has always been Brazil's Achilles heel, and a 7%-8% budget deficit and 70% net debt-to-GDP ratio leave Brazil vulnerable in a global bond selloff," Chris Turner, global head of forex strategy at ING, said.

"Instead of fiscal consolidation under Bolsonaro, Brazilian assets are instead going to have to contend with Lula’s campaign pledges, including a shorter working week," he added.

(Reporting by Stefano Rebaudo; additional reporting by Jiaxing Li in Hong Kong; Editing by Kevin Buckland and Xevi Fontdegloria)