Euro tumbles against US Dollar

MILAN/NEW YORK: The euro (EUR) sank on Monday against a strong US Dollar (USD) 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, increasing the chances that the Federal Reserve could pause cutting interest rates at a policy meeting later this month.

Monday’s rise in the dollar followed the U.S. unit’s first weekly fall posted on Friday since September 2023 as the so-called Trump trade faded.

In Europe, the risk premium investors demand to hold French debt rather than benchmark German bonds jumped after France’s far-right National Rally 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.

“The common currency is coming under pressure as French political dysfunction worsens and intra-euro spreads widen, but it is important to note that European yields are broadly moving lower – French rates are simply falling by less than their counterparts,” said Karl Schamotta, chief market strategist at Corpay in Toronto.

“This is not a repeat of the euro crisis, just a reflection of France’s growing economic challenges.”

Several analysts still reckoned that Le Pen didn’t want to bring down the government as she could be blamed for a financial and economic crisis in France.

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.

TRUMP SHIFT SUPPORTS THE DOLLAR

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.

Following the U.S. data, the markets reduced the odds of a 25-bp easing this month to 62%, from 66% late on Friday, according to CME’s FedWatch. At the same time, rate futures raised the chances of a Fed pause to 38% 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 that 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 0.6% to 106.71.

The Chinese yuan quickly slipped to a 4-1/2-month low at 7.2871 per dollar.

Key to the outlook for rates will be the November payrolls report due Friday, where median forecasts favour a rise of 195,000 following October’s weather and strike-hit report, which could also be revised given a low response rate for that survey.

The jobless rate is seen edging up to 4.2%, from 4.1%, which should keep the Federal Reserve on course to cut by 25 basis points on Dec. 18.

The dollar gained 0.1% on the yen to 149.87, having shed 3.3% last week in its worst run since July. Support lies around 149.47 with resistance at 151.53. 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.