Euro drops near 17-month low amid political and fiscal concerns

The euro faced renewed pressure on Tuesday, hovering near a 17-month low as political uncertainty and fiscal concerns weighed on the currency. The euro slipped to $1.1220 in early Asian trading, extending its 1.2% drop from the previous week and hitting its lowest level since May 2023. Against the British pound, the euro also declined, falling more than 1% last week to 84.83 pence.

The common currency's struggles stem from high debt levels in France and political gridlock, compounded by an upcoming snap election in Spain. Rising French borrowing costs have raised alarms among policymakers, as the weakness in the euro could have broader implications for the eurozone. Joseph Capurso, a strategist at Commonwealth Bank of Australia, expressed a pessimistic outlook, predicting the euro could fall below $1.10. He noted that significant decreases in oil prices, tighter European monetary policy, or fiscal discipline could reverse the trend, though the latter seems unlikely in the near term.

Meanwhile, the dollar continued its rally, supported by elevated US Treasury yields, which reached multi-decade highs overnight. The dollar index climbed to 102.16, having hit an 18-month high in the prior session. The greenback's strength persisted despite reduced expectations for a Federal Reserve rate hike this month, following weaker-than-expected US jobs data. Analysts at Barclays suggested that while inflation revisions may ease urgency, cost pressures still pose challenges to achieving sustainable 2% inflation.

Other currencies also felt the pressure, with the Australian dollar and the New Zealand dollar each slipping 0.07% to $0.6967 and $0.5596, respectively. The dollar gained slightly against the yen, rising to 157.92, while sterling dipped 0.02% to $1.3222.