Euro Slumps as Political Uncertainty and Debt Worries Weigh

The euro dipped near a 17-month low on Tuesday as political instability and fiscal worries across the eurozone put pressure on the currency. The euro fell to $1.1219 in Asian trading after hitting its lowest point since May 2023 in the previous session, marking a 1.2% decline over the past week. Against the British pound, the euro was trading at 84.87 pence, following a 1% drop last week.

The euro's decline was driven by concerns over high debt levels and political gridlock in France, along with uncertainty from a snap election in Spain. These factors are clouding the outlook for the eurozone's finances and economic policy. The drop in the euro coincided with a rise in French borrowing costs, raising concerns about potential spillover effects in other eurozone bond markets.

The dollar, meanwhile, continued to strengthen as U.S. Treasury yields climbed to multi-decade highs. The dollar index reached 102.17 after hitting an 18-month high in the previous session. Sterling eased 0.06% to $1.3216, while the dollar gained 0.18% against the yen to 158.16.

The dollar's gains persisted despite reduced expectations of a Federal Reserve rate hike this month following weaker-than-expected U.S. jobs data. However, investors expect the central bank may need to maintain a restrictive policy stance due to persistent inflationary pressures. U.S. services-sector activity slowed in September, but strong domestic demand continued to push up prices.

The Bank of Japan could announce that underlying inflation has broadly reached its 2% target this month, signaling potential interest rate hikes in the coming months. The Australian dollar was little changed at $0.6971, while the New Zealand dollar slipped 0.05% to $0.5597. Currency markets remain focused on diverging policy and fiscal outlooks across major economies.