U.S Dollar Strength: Euro Nears One-Month Low Amid French Political Unrest

The dollar index remained firm on Monday as the euro hovered near a more than one-month low, influenced by political turmoil in Europe. Investors are now awaiting fresh clues on the strength of the U.S. economy.

Key Takeaways

• The dollar index remains steady, benefiting from the euro's decline due to political turmoil in France.

• The Federal Reserve's current stance suggests only one rate cut this year, likely in December.

• Mixed economic data from China and Japan's monetary policy decisions are impacting global currency markets.

U.S. Dollar Strength Amid European Political Turmoil

Investors are contemplating the risk of a budget crisis at the heart of the euro area. The rise of far-right and leftist parties ahead of France's surprise parliamentary election is pressuring President Emmanuel Macron's centrist administration. Despite the French financial markets enduring a brutal sell-off late last week, European Central Bank policymakers have no plans to discuss emergency purchases of French bonds.

The euro inched down 0.04% to $1.07025 after falling to its lowest since May 1 at $1.06678 on Friday. The currency also logged its biggest weekly decline since April at 0.88% last week. "As the euro accounts for around 57% of the US dollar index weighting, the fall of the euro has indirectly benefited the dollar," said Matt Simpson, senior market analyst at City Index.

Federal Reserve's Impact on U.S. Dollar Strength

The dollar index, which measures the greenback against a basket of peer currencies, was unchanged at 105.54, after touching its highest since May 2 at 105.80 on Friday. Minneapolis Federal Reserve President Neel Kashkari said on Sunday it was a "reasonable prediction" that the U.S. central bank would cut interest rates once this year, likely in December.

Last week, the Fed published updated projections showing the median forecast from all 19 U.S. central bankers for a single interest rate cut this year. This week is light on major U.S. economic data, but U.S. retail sales on Tuesday and flash PMIs on Friday may offer hints about consumption and economic strength.

"Data would likely have to miss estimates by a wide margin to rekindle bets of more Fed cuts, with the FOMC meeting still freshly in the minds of investors," Simpson added.

Global Currency Market Reactions

Sterling held steady at $1.2681. Britain's inflation pressures still appear too hot for the Bank of England to cut rates at its June 20 meeting, with most economists forecasting the first cut would not come until August 1.

The yuan was flat at 7.2557 per dollar after domestic data showed a mixed economic picture in China. New home prices fell at the fastest pace in more than 9-1/2 years in May, while May industrial output came in below forecasts. Retail sales were better than expected. China's central bank left a key policy rate unchanged as expected on Monday.

The yen remained near a 34-year low against the dollar after the Bank of Japan pushed cuts to bond-buying amounts and details of its tapering plan to its July policy meeting. Governor Kazuo Ueda said he would not rule out raising interest rates in July as weakness in the yen pushes up import costs. The yen steadied at 157.45 after slipping to 158.26 on Friday, its lowest since April 29.

Conclusion

The stability of the U.S. dollar amid European political unrest and varying economic data from major global economies continues to influence the forex market. Investors remain focused on upcoming U.S. economic indicators and central bank policies to gauge future movements.