The US dollar strengthened against major currencies on Monday as the euro weakened amid political uncertainty in France and soaring energy prices. At the same time, investors reassessed the outlook for US economic growth and interest rates.
The dollar index, which measures the greenback against a basket of major currencies, rose 0.26 per cent to 102.05. The euro fell 0.25 per cent to $1.1210 as investors weighed the impact of violent weekend unrest in France and mounting pressure from higher energy costs.
France has experienced some of its worst street violence in years, adding to concerns about political stability in the eurozone’s second-largest economy. President Emmanuel Macron has declined Interior Minister Laurent Nunez’s offer to resign following the unrest, the presidential office said on Monday.
Market analysts warned that the situation could put further pressure on the euro if the political turmoil spreads beyond France and undermines confidence across the wider eurozone.
The single currency suffered a sharper decline earlier in October, when the gap between French government bond yields and safer German government debt widened by about 40 basis points in a matter of days, rising above 150 basis points. The spread, a key measure of perceived French financial risk, stood at 141 basis points on Monday, up two basis points.
Energy prices add to pressure on euro
Rising energy costs have added another challenge for European economies that rely heavily on imported fuel.
Natural gas prices climbed to €89.13, their highest level in four years, while Brent crude futures retreated from a five-month high but remained above $100 a barrel.
Higher oil prices have generally supported the US dollar while weighing on currencies such as the euro and Japanese yen, which are more exposed to the cost of energy imports. The trend has intensified since the conflict involving Iran began in March.
However, analysts said the direction of the euro-dollar exchange rate would depend not only on energy prices but also on how the US Federal Reserve and European Central Bank respond to the resulting inflationary pressure.
Thu Lan Nguyen, head of foreign exchange and commodity research at Commerzbank, said investors were paying close attention to the monetary policy response rather than focusing solely on oil prices.
The dollar’s gains could remain limited if markets do not expect the Federal Reserve to respond more aggressively to inflation than the European Central Bank, she indicated.
Investors reconsider outlook for US dollar
The currency market’s attention has also shifted towards the sustainability of US economic growth, following months in which the dollar benefited from strong economic performance and gains in technology shares linked to artificial intelligence.
Investors are increasingly considering whether a weaker outlook for AI-related investment could slow US growth and reduce borrowing requirements. Such a shift could put downward pressure on both the dollar and US Treasury yields.
Interest rate expectations have consequently returned to the forefront of currency trading. The Federal Reserve’s September rate increase had reassured investors about its commitment to controlling inflation.
Markets were pricing in an 87 per cent probability that the Fed would leave interest rates unchanged this month, while anticipating a cumulative 75 basis points of rate cuts by the end of 2027. Expectations for the European Central Bank had followed a broadly similar path.
Yen steady as traders assess Japan’s policies
The US dollar edged up 0.05 per cent against the Japanese yen to 158.15 yen on Monday.
Bank of Japan Governor Kazuo Ueda said underlying inflation was approaching the central bank’s two per cent target, signalling that further interest rate increases remained possible.
However, concerns about Prime Minister Sanae Takaichi’s spending plans and the potential impact on Japan’s already substantial public debt continued to weigh on investor sentiment.
Against the offshore Chinese yuan, the dollar slipped 0.05 per cent to 6.6815 yuan, its weakest level since June 2022. The move followed data showing that China’s gross domestic product grew slightly faster than expected in the third quarter.
Elsewhere in Asia, the Indonesian rupiah fell for a fourth consecutive session, losing 0.2 per cent to trade near a three-month low. The currency remained under pressure after index provider MSCI warned it could downgrade Indonesia’s stock market from its flagship emerging markets index to standalone status, triggering an 11.6 per cent plunge in equities.
The Australian dollar moved in the opposite direction, gaining 0.4 per cent to $0.6971.
The latest currency movements reflect a market increasingly influenced by energy costs, political risks and expectations for central bank decisions, with investors weighing whether the dollar can sustain its strength as the outlook for US growth evolves.
