The dollar gained ground in early Asian trading on Monday, recovering from its lowest levels of the month, as violent protests in France weighed on the euro. The unrest in France, described as some of the worst in years, has raised concerns about political stability and compounded worries over high energy prices.
The euro fell 0.25% to $1.1210, following a more than 1% drop earlier in October. The spread between French OATs and German Bunds widened to above 150 basis points, increasing risk premiums for other euro zone countries. Analysts noted that the euro's reaction in early October was more dramatic, with sustained pressure typically occurring only if French political tensions spread beyond national borders.
Investors are reassessing their outlook for the forex market, particularly the impact of AI-driven spending on US economic growth. Analysts suggest that a weaker outlook for AI investment could slow US growth and reduce borrowing needs, potentially dragging down both the dollar and Treasury yields. The interest-rate outlook has returned as a main market driver, supported by the Fed's September rate hike, which reassured investors of US policymakers' commitment to tackling inflation.
Thu Lan Nguyen, head of forex and commodity research at Commerzbank, emphasized that the oil price itself is less significant than how the Fed and ECB respond to it. As long as markets do not expect the Fed to react more forcefully to inflationary shocks, the dollar will struggle to capitalize on the fundamental advantage provided by higher oil prices. Brent crude futures slipped from a five-month high but remained above $100, while natural gas prices hit a fresh four-year high at €89.13.