Euro dips on French turmoil, US dollar lifted as stocks rebound

By Karen Brettell

Oct 19 (Reuters) - The euro fell against the dollar on Monday as riots in France added to concerns about the country's worsening fiscal outlook, while the US currency was boosted by a rebound in AI stocks.

France's central government asked some local authorities to impose curfews as it faced pressure over security failings on Monday after a weekend of riots and looting stemming from nationwide anti-government protests.

The unrest is also seen as improving National Rally leader Marine Le Pen's chances of winning next year's presidential election, which could raise questions over France remaining in the European Union.

"She's really running on a fiscal austerity program, but she's anti-EU," said Marc Chandler, chief market strategist at Bannockburn Global Forex.

The euro fell 0.24% to $1.1212. The spread between French OATs and safe-haven German Bunds has widened to 147 basis points, trading at levels last seen during the 2011 to 2012 European debt crisis, from around 110 bps in late September.

The dollar index , which measures the greenback against a basket of currencies including the yen and the euro, rose 0.17% to 101.97.

The dollar was boosted as AI-related stocks rebounded from last week's sharp selloff. The greenback was dented last week by concerns that waning enthusiasm for AI stocks would stem capital inflows and reduce demand for the US currency.

"Markets appear to have a clear reaction function in mind: stock market turmoil is enough to drastically reduce Federal Reserve tightening plans, even with inflation running hot," said Francesco Pesole, FX strategist at ING.

“The reasoning is probably linked to the market wealth effect that many believe has underpinned US economic resilience. This is enough to suggest the dollar will not be the safe haven of choice and may actually lag many other G10 currencies if stock market instability originates in tech/AI,” he said.

Recent comments from Fed officials, including Chairman Kevin Warsh, also suggest policymakers are in no rush to hike rates again.

On Friday, Warsh expressed optimism about US economic strength but gave no indication of whether or when more hikes would be needed.

Fed funds futures traders see the Fed holding rates steady at its October 27 to October 28 meeting and are pricing in 91% odds of a hike in December.

The Australian dollar rose 0.49% versus the greenback after China's economic growth rebounded from three-year lows, expanding at a 4.5% annual pace in the third quarter.

The Canadian dollar pared gains after data showed Canada's annual inflation rate rose to 3.1% in September, slightly below economists’ expectations.

But hawkish comments from Bank of Canada Governor Tiff Macklem on Saturday kept the currency elevated. He said that the central bank expects to raise its quarterly inflation forecast significantly this month owing to persistently high crude oil and petroleum product prices.

The loonie was last up 0.27% versus the greenback at C$1.41 per dollar.

Separately, oil-rich Alberta holds a nonbinding referendum on Monday on whether the western province should secede from Canada.

The Japanese yen weakened 0.35% against the greenback to 158.49 per dollar.

Bank of Japan Governor Kazuo Ueda said on Monday that underlying inflation is "quite close" to the central bank's 2% target with strong global AI demand adding to inflationary pressure from a tight job market, signaling scope for further rate increases.