Euro Rebounds Sharply as French Bond Yields Ease Debt Concerns
The euro made a strong rebound on Tuesday, marking its biggest daily gain in seven weeks after hitting a 17-month low the previous day. The currency rose 0.35% to $1.126, recovering from a slide to $1.116 on Monday. The euro had experienced four consecutive weekly declines, with a drop of over 1% in the prior week. The pullback in French government bond yields helped ease concerns about debt market strain in the eurozone.
The dollar index, which tracks the greenback against a basket of currencies, fell 0.32% to 101.83, its largest daily drop since September 3. Bond yields worldwide have been climbing due to expectations of central bank rate hikes driven by rising energy prices amid the Iran war and inflation concerns. French debt faced pressure as politicians struggled to reduce the budget deficit ahead of a divisive 2027 election, while a snap election in Spain added to the euro's recent challenges.
Energy prices eased early on Tuesday, helping French bonds rally. The key 10-year French bond yield dropped 11.4 basis points to 4.7506%. Crude prices initially fell due to rising Middle Eastern crude exports and a G7 emergency stockpile release but later rebounded. Marc Chandler, chief market strategist at Bannockburn Capital Markets, noted that Saudi-backed Yemen forces recapturing strategic territory from the Houthis led to a sharp drop in oil prices, which in turn helped lower bond yields in France and Italy, boosting the euro.
Far-right French presidential candidate Marine Le Pen increased her planned spending cuts to €140 billion if she wins power in 2027. The dollar's decline helped other currencies, with sterling rising 0.42% to $1.3275, its biggest daily gain since August 19. The yen was an exception, with the dollar up 0.11% to 158.08 against the Japanese currency. The Bank of Japan may signal this month that underlying inflation has hit its 2% target, indicating readiness for further rate hikes.
The US dollar's recent strength came despite retreating expectations for a Federal Reserve rate hike in October, following weaker-than-expected US jobs data and comments from some Fed officials. However, markets anticipate more rate hikes later this year and next. Goldman Sachs analysts attributed September's dollar gains to US equities' exposure to technology and AI, along with recent outperformance of US growth, but cautioned against near-term dollar strength due to stretched positioning and Fed communication emphasizing patience. Kansas City Fed President Jeff Schmid advocated for further rate hikes to lower inflation, even as higher long-term yields weigh on economic activity. Markets price in an 86% chance for a Fed rate hike in December.