Published : 6 days ago, on 03/12/2024

By Amanda Cooper

LONDON (Reuters) -The euro edged up on Tuesday, regaining some poise after political turmoil in France sent traders scrambling for hedging protection against further price swings, while the yuan hit a 13-month low on tariff risks and weakness in China’s economy.

The yen, which has gained nearly 4.5% in the last two weeks, retreated slightly against the dollar, but remained near six-week highs, as traders are growing increasingly confident that Japan may hike rates this month.

The euro, which had been the weakest G10 currency through November, began this month with a 0.7% fall on Monday and was last hovering at $1.0487, as France’s government heads for collapse over a budget impasse. [EUR/GVD]

French Prime Minister Michel Barnier faces a vote of no confidence on Wednesday after fierce opposition from across the political spectrum to his budget, which contains painful tax rises and spending cuts aimed at repairing the country’s precarious finances.

Demand for hedges, as reflected by euro options volatility, has hit its highest since March 2023 this week and, with the combination of a string of weak data, political uncertainty in major euro zone economies and the seemingly unstoppable dollar, the single European currency could struggle.

“There is just so much going against the euro at the moment…the list of headwinds is just growing longer by the day,” City Index market strategist Fiona Cincotta said.

“Today, you’ve got political instability in France, obviously and even in Germany, it’s rumbling and there’s sort of a sense of unease in that you’ve got the weak economic outlook,” she said.

In the last month, the euro has lost 3% against the dollar and more than 1% against both the pound and the Swiss franc.

DOLLAR RESTING, FOR NOW

The dollar typically suffers seasonal weakness in December as companies tend to buy foreign currencies. However, traders are keeping a wary eye this year on President-elect Donald Trump’s incoming administration and supporting the greenback.

Over the weekend, Trump threatened punitive tariffs unless BRICS member countries committed to the dollar as a reserve currency.

“The remarks strengthen the view that Trump may not look to weaken the dollar during his presidential term and will instead be relying on tariffs to tackle the U.S.’s large goods trade imbalance,” Rabobank strategist Jane Foley said in a note.

“We maintain the view that euro/dollar could drop to parity around the middle of next year. The timing may coincide with the introduction of new tariffs by Trump.”

China’s yuan had already sold off in anticipation of more tariffs from Trump and improving U.S. manufacturing data and a dive in Chinese bond yields to record lows have pulled the currency towards 7.3 per dollar for the first time since last November. [CNY/]

China fixed the yuan’s trading band at its weakest in more than a year and traders ran with it to sell the currency at 7.2996 per dollar. It traded at 7.24 on Friday. [CNY/]

The Australian dollar rose 0.4% to $0.6503, reversing some of the previous session’s 0.7% fall. Economic data was mixed, with a bigger-than-forecast current account deficit countered by a jump in government spending that is likely to boost growth.

The yen, the only G10 currency to gain on the dollar last month, touched its strongest since late October on Monday at 149.09 to the dollar and was last at 149.89, leaving the dollar up 0.2% on the day.

Markets are pricing in a near-60% chance of a 25 basis point rate hike in Japan this month.

The overriding question for investors is what Friday’s U.S. employment data will show and how likely it makes another rate cut from the Federal Reserve this month. Right now, there is a roughly 70% chance of a cut.

Job openings figures are due later on Tuesday.

(Additional reporting by Tom Westbrook in Singapore; Editing by Jacqueline Wong and Nicholas Yong, Kirsten Donovan)