Euro faces political, fiscal reckoning as it hovers near 17-month low

Euro Faces Political and Fiscal Headwinds as It Nears 17-Month Low

By Rae Wee

Euro Struggles Amid Political Uncertainty and Fiscal Concerns

SINGAPORE, Oct 6 (Reuters) - The euro struggled near a 17-month low on Tuesday, weighed down by political uncertainty and fiscal concerns across the euro zone, while the dollar extended its blistering rally as it rode US Treasury yields higher.

Recent Performance of the Euro

The euro ticked slightly lower to $1.1220 in the early Asian session, having slid to its lowest since May 2025 in the previous session and extending its 1.2% fall from last week.

It was last at 84.83 pence, having also lost more than 1% against the British pound last week.

Key Drivers of Euro Weakness

The common currency has come under pressure due to worries about high debt levels and political gridlock in France, with an upcoming snap election in Spain adding to headwinds.

A sliding euro is also the latest alarm bell for policymakers facing a surge in French borrowing costs that has started to spill over into the broader euro area.

Expert Opinions on the Euro's Outlook

"We're pretty pessimistic about the euro. We think it's going to go down to under $1.10," said Joseph Capurso, a strategist at Commonwealth Bank of Australia.

"We're not surprised that we've seen this weakness... For the euro to rise, you'd need a big decrease in oil prices... a big increase in expectations for European monetary policy tightening. Another one would be them starting to get their act together on reining in the budget deficit, though I think there's no chance of that happening anytime soon," Capurso added.

Dollar Strengthens as US Treasury Yields Rise

In the broader market, the dollar marched higher, drawing support from still-elevated US Treasury yields, which scaled multi-decade highs overnight.

Against the yen, the dollar rose a touch to 157.92, while sterling slipped 0.02% to $1.3222.

The dollar index firmed at 102.16, having scaled an 18-month high in the previous session.

Factors Supporting the Dollar

The greenback's strength has come despite reduced expectations for a Federal Reserve rate hike this month in the wake of weaker-than-expected US jobs data, as investors bet the central bank would still need to tighten policy further.

"Although inflation revisions and data reduce the urgency to tighten, cost pressures still fuel doubts that conditions are in place to sustain 2% inflation," said analysts at Barclays in a note.

US Economic Data and Inflation Concerns

Data on Monday showed the US services-sector activity slowed in September, with strong domestic demand stretching supply chains and raising prices paid by businesses for inputs, indicating that inflation could remain high into next year.

Other Major Currencies React

Elsewhere, the Australian dollar fell 0.07% to $0.6967, while the New Zealand dollar similarly eased 0.07% to $0.5596.

(Reporting by Rae Wee; Editing by Muralikumar Anantharaman)