Euro Rebounding on Easing French Debt Jitters

The euro rebounded on Tuesday, marking its strongest daily gain in seven weeks after hitting a 17-month low the previous day. This recovery was fueled by a decline in French government bond yields, which helped ease concerns about eurozone debt markets. The euro rose 0.35%, reaching $1.126, while the dollar index fell 0.32% to 101.83, its biggest daily drop since September 3.

The recent surge in global bond yields has been driven by expectations of aggressive central bank rate hikes, fueled by rising energy prices due to the Iran war and inflation worries. French debt has faced increased pressure as politicians struggle to control the budget deficit ahead of a divisive 2027 election, with Spain's snap election adding to the euro's recent struggles.

Early declines in energy prices on Tuesday supported a rally in French bonds, with the 10-year yield dropping 11.4 basis points to 4.7506%. Crude oil prices initially fell due to rising Middle Eastern exports and a G7 emergency stockpile release, but later rebounded. Marc Chandler, chief market strategist at Bannockburn Capital Markets, noted that Saudi-backed Yemeni forces recapturing strategic territory from the Houthis helped lower oil prices, which in turn reduced bond yields in France and Italy.

The yen was the exception, with the dollar up 0.11% to 158.08 against it. The Bank of Japan may signal this month that underlying inflation has hit its 2% target, indicating readiness for further rate hikes. Meanwhile, the US dollar's strength has persisted despite weaker-than-expected jobs data and mixed signals from Fed officials about potential rate hikes. The chance of a Fed rate hike in October stands at 19%, but markets are pricing in an 86% chance for December.