Author: Stefano Rebauldo and Tom Westbrook
(Reuters) – The dollar jumped to a near four-year high against the yen ahead of key inflation data as political uncertainty ahead of a French election sent the euro to its biggest monthly loss since January.
Investors are worried that France’s new government may increase fiscal spending, threatening the sustainability of the country’s public debt and the EU’s financial stability.
Meanwhile, traders are cautiously testing Japan’s resolve to protect its currency while keeping a close eye on key U.S. inflation data.
The euro fell 0.05% to $1.0695, ending the month down 1.33%, its biggest drop since January, when the euro fell 1.99%.
The risk premium for investors holding French government bonds rose to the highest since 2012 on Friday ahead of this weekend’s first round of voting in France’s parliamentary elections, as investors anticipated the emergence of a far-right or far-left coalition. The new government increased fiscal spending.
“Markets are still pricing in a gridlock in the legislature or a relatively benign scenario from a Perikatan Nasional government that only partially implements its manifesto,” said Aman Bansal, head of European rates strategy at Citi.
He added that the spread between French and German government bond yields, a measure of the risk premium on French debt, currently stands at 84 basis points, which would increase if the far right or far left implements much of their manifesto and President Macron resigns. The difference could widen to 135 basis points.
Chris Turner, head of FX strategy at ING, said: “Our Eurozone team suspects that it would be premature for the new government to significantly water down its pre-election commitments, and months into September. Difficulties are likely to be encountered.
The yen hit 161.27 against the dollar, its lowest level since 1986.
“USD/JPY is very much driven by U.S. interest rates,” said Rong Ren Goh, a portfolio manager in the fixed income team at Eastspring Investments in Singapore.
“If the aim is to prevent a sharp depreciation of the yen, they may also want to save bullets in case U.S. Treasury yields rise again in the second half of the year, which is very likely to happen in the context of Treasury supply and fiscal deficit issues.” He added .
US presidential debate
U.S. Republican presidential candidate Donald Trump launched a series of at times false attacks on President Joe Biden during the first campaign debate in Atlanta, with Biden stuttering several times in the early exchanges, sending the dollar higher.
“Biden’s impression is very bad,” said Jason Wong, market strategist at BNZ in Wellington.
He said this increases the likelihood of a Trump presidency and import tariffs, noting that traders are buying the dollar, but the move is quite modest.
The index matched Wednesday’s eight-week high of 106.13 and is up 1.5% so far this quarter.
It was the second straight quarter of gains as markets lowered expectations for U.S. interest rate cuts over the past six months. The Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) index, will be released later on Friday. If annual growth slows to 2.6% in May, as economists expect, it could pave the way for cuts later this year.
The biggest loser this quarter has been the yen, down 6% against the dollar since the end of March and more than 12% so far in 2024.
Earlier on Friday, the euro hit a record low against the euro at 172.38 euros. Data on Friday showed core inflation accelerated in the Japanese capital in June, but that did little to support the yen.
Japan’s low interest rates are encouraging people to sell the yen in exchange for higher-yielding currencies, even as Japanese yields have begun to rise and officials have warned of a new round of currency intervention.
Japan on Friday replaced its top monetary diplomat, Masato Kanda, with financial regulatory expert Atsushi Mimura. Japanese Finance Minister Shunichi Suzuki said the authorities were “deeply concerned” about the impact of “rapid and one-sided” fluctuations in the yen.
