Euro Struggles Near 17-Month Low Amid Political and Fiscal Uncertainty

The euro hovered near its 17-month low on Tuesday, facing pressure from political uncertainty and fiscal concerns across the euro zone. The currency dipped slightly to $1.1220 in early Asian trading, extending a 1.2% decline from the previous week. The euro also lost ground against the British pound, falling over 1% last week and reaching 84.83 pence.

High debt levels and political gridlock in France, along with an upcoming snap election in Spain, have weighed heavily on the euro. Rising French borrowing costs are raising alarm bells for policymakers, as the fiscal challenges begin to impact the broader euro area. Joseph Capurso, a strategist at Commonwealth Bank of Australia, expressed pessimism about the euro's future, predicting it could drop below $1.10.

Capurso noted that a significant decrease in oil prices, higher expectations for European monetary policy tightening, or fiscal discipline in the euro zone could reverse the euro's decline. However, he deemed the last scenario unlikely in the near term.

Meanwhile, the US dollar continued its rally, supported by elevated Treasury yields, which hit multi-decade highs overnight. The dollar rose against the yen and sterling, with the dollar index firming at 102.16 after reaching an 18-month high. Despite weaker-than-expected US jobs data reducing expectations for a Federal Reserve rate hike this month, investors still anticipate further policy tightening due to persistent inflation pressures.

Data released on Monday showed a slowdown in US services-sector activity in September, with supply chain strains and rising input costs suggesting inflation could remain high into next year. Elsewhere, the Australian and New Zealand dollars both saw minor declines.