Euro Edges Up After French Government Collapse, Dollar Steady Amid Rate Cut Expectations
The euro saw a marginal increase against the US dollar on Wednesday, retreating slightly from session highs, following the widely anticipated collapse of the French government after a successful no-confidence vote by opposition lawmakers. The political turmoil in France introduced uncertainty into the European economic landscape, though the immediate impact on the euro was muted. Meanwhile, the US dollar remained largely unchanged as market participants continued to price in a December interest rate cut by the Federal Reserve, fueled by indications of a slowing American economy.
The South Korean won, which experienced significant volatility on Tuesday, rebounded against the dollar, supported by suspected central bank intervention and assurances of "unlimited" liquidity support from the finance ministry. This followed a dramatic Tuesday where South Korean President Yoon Suk Yeol briefly declared martial law before rescinding the order hours later. The political instability in South Korea added to market anxieties.
The French government’s downfall came after far-right and left-wing lawmakers united to support a no-confidence motion against Prime Minister Michel Barnier and his administration, securing a majority of 331 votes. Barnier is expected to tender his resignation to President Emmanuel Macron, plunging the eurozone’s second-largest economy deeper into political crisis and potentially exerting further downward pressure on the euro. The unfolding political drama raises questions about the future direction of French policy and its impact on the broader European Union.
Market participants are also assessing remarks made by European Central Bank (ECB) President Christine Lagarde during a parliamentary hearing on Wednesday. While Lagarde indicated the ECB’s intention to continue lowering interest rates, she refrained from specifying the pace of easing, leaving investors to speculate on the central bank’s next moves. Economists largely anticipate a further 25 basis-point rate cut at the ECB’s upcoming December 12 meeting, the fourth such reduction this year.
In the United States, the dollar index remained flat at 106.33 as Wednesday’s economic data reinforced expectations of an interest rate cut by the Federal Reserve later this month. A report on private payrolls showed moderate growth in November, falling short of forecasts. Additionally, annual wage growth for employees remaining in their current positions saw a marginal increase for the first time in 25 months. The ADP report indicated an increase of 146,000 private sector jobs last month, following a downwardly revised 184,000 increase in October. Economists had predicted a 150,000 rise in private employment.
Further supporting the case for a rate cut, activity in the US services sector decelerated in November after experiencing robust growth in recent months. The Institute for Supply Management’s non-manufacturing purchasing managers index dipped to 52.1 last month, down from 56.0 in October, which was the highest reading since August 2022. Economists had projected a more modest decline to 55.5. The softening economic data strengthens the argument for continued monetary easing by the Fed.
Fed funds futures now reflect a 78% probability of a 25 basis-point rate cut this month, up from 73% late Tuesday. Conversely, the likelihood of the Fed pausing its easing cycle has decreased to 22% from 27% the previous day, according to the CME’s FedWatch tool. Market analysts suggest that a further rate cut in December could exert temporary downward pressure on the dollar, given existing long dollar positions. However, any dollar weakness is expected to be short-lived unless US economic data deteriorates significantly, a scenario not currently anticipated.
The dollar received a modest boost after St. Louis Federal Reserve President James Bullard indicated his expectation for the Fed to continue cutting rates while emphasizing that the central bank is maintaining flexibility regarding its December 17-18 meeting. Bullard is set to be a voting member of the Federal Open Market Committee (FOMC) next year. Fed Chair Jerome Powell later appeared to signal a preference for a slower pace of rate cuts, highlighting the current strength of the US economy compared to the central bank’s September expectations when it initiated its easing cycle. The differing perspectives within the Fed add to the uncertainty surrounding the December meeting’s outcome.
