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

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) -The euro faltered on Monday against a strong U.S. dollar on growing concerns about a possible government collapse in France, which would stall plans to curb a burgeoning budget deficit.

The greenback, meanwhile, extended gains after strong U.S. manufacturing data from both the Institute for Supply Management and S&P Global reports. However, despite the generally upbeat data, Federal Reserve Governor Christopher Waller said on Monday he was inclined to cut the benchmark interest rate at the Dec. 17-18 meeting as monetary policy remained restrictive.

Monday’s rise in the dollar against a basket of currencies followed the U.S. unit’s first weekly fall posted on Friday since November 2023.

In Europe, the risk premium investors demand to hold French debt rather than benchmark German bonds jumped after France’s far-right National Rally (RN) President Jordan Bardella said his party would likely back a no-confidence motion in the coming days unless there were a “last-minute miracle”.

Leading RN lawmaker Marine Le Pen has given Prime Minister Michel Barnier until Monday to meet her party’s budget demands.

The euro fell 1% to $1.0469, on track for its largest daily fall since early November.

Crashing political sentiment in France and another activity data beat in the U.S. have handed the euro a dire start to December,” wrote Kyle Chapman, FX market analyst at Ballinger Group, in emailed comments. Ballinger provides currency risk management and trading services.

“As expected, the interim government now faces a vote of no confidence that it is likely to lose, and with a new election not allowed until the summer, there is no clear path to reducing the deficit in the near term.”

The yield spread between French and German 10-year government bonds – a gauge of the premium investors demand to hold French debt – rose 7.6 basis points to 87.3 bps after hitting 90 bps last week, its highest level since 2012, during the euro area’s sovereign debt crisis.

POSITIVE US DATA; WALLER BACKS FED CUT IN DECEMBER

Monday’s data once again showed a resilient American economy, with U.S. manufacturing activity improving in November, orders growing for the first time in eight months, and factories facing significantly lower prices for inputs.

The Institute for Supply Management’s manufacturing PMI increased to 48.4 last month from 46.5 in October, which was the lowest level since July 2023.

The S&P Global final manufacturing PMI also rose to 49.7, from the initial 48.8 estimate.

With a solid economic situation in the United States, it makes sense of the U.S. dollar to be thriving as the economies on the other side of the pond face more headwinds,” said Juan Perez, director of trading at Monex USA in Washington.

(Positive data) only makes for higher Treasury yields and even lower expectations of the Fed exercising looser monetary policy.

Fed’s Waller, however, noted on Monday that monetary policy remains restrictive enough that a further cut later this month at their meeting “will not dramatically change the stance of monetary policy and allow ample scope to later slow the pace of rate cuts, if needed.”

Following Waller’s comments, the markets raised the odds of a 25-bp easing this month to 79%, from 66% late on Friday, according to CME’s FedWatch. At the same time, rate futures reduced the chances of a Fed pause to 21% from 34% on Friday.

The greenback had earlier gained as President-elect Donald Trump marked a shift from his prior advocacy of a weaker dollar by demanding BRICS member countries commit to not creating a new currency or supporting another currency.

The Kremlin said on Monday any U.S. attempt to compel countries to use the dollar would backfire.

The U.S. dollar index – a measure of its value relative to a basket of its main peers — rose 0.3% to 106.33.

Key to the outlook for rates will be the November payrolls report due Friday, where median forecasts favor a rise of 195,000 following October’s weather and strike-hit report, which could also be revised given the low response rate for that survey. The jobless rate is seen edging up to 4.2%, from 4.1%,

The dollar slipped 0.2% versus the yen to 149.37, having shed 3.3% last week in its worst run since July. Over the weekend, Bank of Japan Governor Kazuo Ueda said the next interest rate hikes are “nearing in the sense that economic data are on track,” following figures showing Tokyo inflation picked up in October.

Currency

bid

prices at

2

December​

09:05

p.m. GMT

Descripti RIC Last U.S. Pct YTD Pct High Low

on Close Change Bid Bid

Previous

Session

Dollar 106.38 106.04 0.34% 4.94% 106.73 106.

index 02

Euro/Doll 1.0498 1.0576 -0.74% -4.89% $1.0587 $1.0

ar 461

Dollar/Ye 149.54 149.49 0.04% 6.03% 150.755 149.

n 15

Euro/Yen 1.0498​ 158.35 -0.85% 0.89% 158.64 156.

39

Dollar/Sw 0.8863 0.8813 0.58% 5.32% 0.8889 0.88

iss 14

Sterling/ 1.2651 1.2741 -0.7% -0.58% $1.2745 $1.2

Dollar 619​

Dollar/Ca 1.4046 1.4001 0.33% 5.97% 1.409 1.39

nadian 86

Aussie/Do 0.6473 0.6519 -0.69% -5.05% $0.6527 $0.6

llar 443

Euro/Swis 0.9303 0.932 -0.18% 0.18% 0.9324 0.92

s 9

Euro/Ster 0.8295 0.8304 -0.11% -4.3% 0.8305 0.82

ling 71

NZ 0.5882 0.5924 -0.57% -6.79% $0.592 0.58

Dollar/Do 65

llar

Dollar/No 11.103​ 11.0181 0.77% 9.55% 11.1578 11.0

rway 626

Euro/Norw 11.657 11.662 -0.04% 3.86% 11.6899 11.6

ay 37

Dollar/Sw 10.993 10.8844 1% 9.13% 11.0383 10.8

eden 868

Euro/Swed 11.5413 11.521 0.18% 3.74% 11.5552 11.5

en 165

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Stefano Rebaudo in Milan; Editing by Shri Navaratnam, Gareth Jones, Toby Chopra and Jonathan Oatis)