Written by Karen Brettell
(Reuters) – The euro is heading towards its biggest weekly decline against the dollar in two months on Friday, amid fears that a new government will worsen the financial situation in France with early parliamentary elections approaching.
The yen hit its lowest level in six weeks against the dollar before rebounding after the Bank of Japan surprised markets with an update on easy monetary policy.
French markets witnessed the largest weekly jump since 2011 in the premium required by investors to maintain French government debt, and bank stocks fell on Friday.
The concern is “instability combined with already existing budget pressures,” said Brad Bechtel, global head of FX at Jefferies in New York, adding that “anytime spreads widen in Europe, the euro suffers.”
French Finance Minister Bruno Le Maire said on Friday that the second largest economy in the euro zone is at risk of a financial crisis if the far right or left wins due to huge spending plans.
Marine Le Pen's Eurosceptic National Front party is leading in opinion polls.
“At both ends of the French political spectrum, the parties that are campaigning are fiscally expansionary parties,” said Karl Chamuta, chief market strategist at Corby in Toronto. “Markets are mostly responding to additional financial pressures.”
The euro is heading towards a weekly loss of 0.95%, the largest since April, and in the latest transactions it was down 0.34% at $1.0699. The currency reached $1.06678, its lowest level since May 1.
The weakness of the euro helped push the dollar higher. The index – which measures the currency against six peers – rose 0.3% to 105.55 and reached 105.80, the highest level since May 2.
“We are seeing flows into the US at both ends of the spectrum – from the safe-haven side as well as from the yield-seeking side – given that US yields are still much higher than those available elsewhere,” Shamota said.
The European Central Bank and the Bank of Canada began cutting interest rates while the Federal Reserve remained steady.
The US central bank adopted a tougher tone than expected at this week's meeting when Fed officials expected to cut interest rates only once this year and postponed the start of rate cuts to late December.
But for now, “the Fed is kind of taking a backseat when it comes to the dollar,” Bechtel said. Instead, he added, elections in emerging markets and Europe are driving the moves.
US consumer confidence deteriorated in June as households worried about inflation and income, a poll showed on Friday.
Other data showed that US import prices fell unexpectedly in May amid falling energy product prices, providing another boost to domestic inflation expectations.
Lower-than-expected consumer and producer price inflation for May this week helped raise hopes that inflation will continue to ease near the Federal Reserve's annual target of 2% and make a rate cut possible as soon as September.
Chicago Fed President Austin Goolsbee said on Friday that he felt “relief” after the consumer inflation data, but added that more progress was needed.
The yen fell after the Bank of Japan's decision to hold interest rates and resume bond buying.
In a surprise to markets, the Bank of Japan said it would continue buying government bonds at the current pace for now and would detail its plan to reduce bond purchases at its policy meeting in July.
Bank of Japan Governor Kazuo Ueda said the central bank is “paying close attention” to the impact of a weak yen on inflation, and added that an interest rate hike in July is possible, depending on economic data.
In the latest trading, the dollar rose 0.17 percent to 157.29, after previously reaching 158.26, the highest level since April 29.
The decline in the value of the yen to its lowest level in 34 years at 160.245 yen to the dollar at the end of April triggered several rounds of Japanese official intervention totaling 9.79 trillion yen (62 billion US dollars).
In cryptocurrencies, Bitcoin fell 1.84% to $65,453.
