Dollar Strengthens Amid Global Uncertainty; Euro Weakens on French Political Turmoil
The US dollar advanced on Wednesday, capitalizing on its safe-haven appeal as political and economic uncertainties gripped various regions of the globe, including South Korea, Europe, the Middle East, and Ukraine. Concurrently, the euro faltered ahead of a crucial no-confidence vote in the French parliament, a vote widely anticipated to destabilize the already fragile coalition government. The US Dollar Index, a benchmark measuring the greenback’s performance against a basket of six major currencies, edged up 0.1% to 106.465. Analysts attributed the dollar’s resilience to its perceived safety and high liquidity amidst global turbulence, making it an attractive option for investors seeking stability. This demand is further reinforced by relatively high US interest rates compared to other developed economies.
Adding to the euro’s woes, disappointing economic data emerged from the eurozone, revealing a significant contraction in business activity. The HCOB final Composite Purchasing Managers’ Index (PMI) for the eurozone, a key indicator of economic health, plummeted to 48.3 in November, down from 50.0 in October, signaling a sharp decline in both manufacturing and services sectors. This downturn further dampened investor sentiment towards the euro, exacerbating its weakness against the dollar. The combination of political instability in France and deteriorating economic conditions across the eurozone amplified the pressure on the single currency.
The French political landscape became increasingly precarious as lawmakers prepared for a no-confidence vote that threatened to topple the government. The opposition parties’ apparent reluctance to support Prime Minister Michel Barnier’s budget proposals, aimed at tackling a substantial budget deficit, fueled the political crisis. This uncertainty further undermined the euro, pushing it down 0.1% to 1.0501 against the dollar. Analysts highlighted a multitude of factors contributing to the euro’s vulnerability, including European political risks, weak economic activity, the looming threat of trade wars, and rising energy prices, specifically the increasing pressure on EU gas inventories.
Across the English Channel, the British pound displayed resilience, trading 0.1% higher at 1.2677 against the dollar, buoyed by the UK services sector remaining in expansion territory. Bank of England Governor Andrew Bailey reiterated expectations of gradual interest rate cuts over the next year, emphasizing that the disinflationary process is firmly underway. While acknowledging recent declines in inflation, Bailey cautioned that inflation might temporarily rise above the target level again. This balanced approach contributed to the pound’s relative stability against the backdrop of broader market volatility.
Meanwhile, in Asia, the South Korean won recovered some ground after a tumultuous period. Earlier, the won had plummeted to its lowest level against the dollar since November 2022 following President Yoon Suk-Yeol’s declaration of martial law, a move quickly retracted after widespread condemnation. The South Korean central bank’s intervention helped to stabilize the won, paring back some of the earlier losses. The Chinese yuan also rebounded from its recent lows, supported by a stronger-than-expected central bank midpoint fixing.
The Australian dollar, however, struggled, weakening by 1% to 0.6421 against the dollar, hitting its lowest point since early August. This decline followed disappointing economic data showing weaker-than-anticipated growth in the third quarter, prompting speculation that the Reserve Bank of Australia might cut interest rates earlier than previously anticipated, potentially in early 2025. The combination of political instability, economic concerns, and diverging central bank policies contributed to the dynamic fluctuations in currency markets.
Looking ahead, market participants are keenly awaiting the release of key US economic data, including the ADP National Employment Report for November and the highly anticipated monthly nonfarm payrolls report due on Friday. These data releases will offer crucial insights into the health of the US labor market and could influence the Federal Reserve’s monetary policy decisions. Furthermore, a scheduled speech by Fed Chair Jerome Powell in Washington will be closely scrutinized for any clues about the future direction of interest rate policy. While some analysts predict potential softening of US macroeconomic data, which could exert downward pressure on the dollar, they also caution that taking defensive positions in currencies like the Japanese yen or Swiss franc can be costly. Market-implied odds of a quarter-point rate reduction by the Federal Reserve in December currently stand at 75%, according to CME’s FedWatch Tool.
