Euro drops amid high energy prices and street riots in France

By Stefano Rebaudo

Oct 19 (Reuters) - The euro fell on Monday as high energy prices compounded concerns over France's political stability after the country was rocked by some of its worst unrest in years.

French President Emmanuel Macron has declined Interior Minister Laurent Nunez's offer to resign after widespread weekend rioting, the Elysee presidential office said on Monday.

Analysts noted that the euro's reaction in early October was much more dramatic and followed a familiar playbook: the single currency tends to come under sustained pressure only if French political tensions spill beyond national borders and weigh on sentiment across the euro zone.

The euro dropped 0.25% to $1.1210 . It fell more than 1% at the turn of the month after the spread between French OATs and safe-haven German Bunds widened by about 40 basis points to above 150 bps within days, increasing risk premiums of other countries of the bloc. The French spread was last up 2 bps at 141 bps on Monday.

Analysts argued that investors reassessed their narrative about the forex market last week after the greenback had been supported for months by robust US economic growth and equity market gains driven by the AI boom.

They are increasingly focused on the risk that AI-driven spending could slow due to a weaker outlook for AI investment which would likely weigh on US growth while reducing borrowing needs, a combination that could drag both the dollar and Treasury yields lower.

The interest-rate outlook returned as a main market driver, also helped by the Fed's September rate hike which reassured investors that US policymakers remained committed to tackling inflation.

“For the euro/dollar, it is currently less the oil price itself that matters than how the Fed and ECB respond to it,” Thu Lan Nguyen, head of forex and commodity research at Commerzbank, said.

“As long as markets do not expect the Fed to react much more forcefully to the inflationary shock, the dollar will struggle to fully capitalize on the fundamental advantage provided by higher oil prices,” she added.

Higher oil prices have supported the dollar while weighing on energy-importing currencies such as the euro and yen, since the conflict in Iran erupted in March. Brent crude futures slipped from from a five-month high but were still above $100. Gas natural prices hit a fresh 4-year high at €89.13.

Markets see an 87% chance that the Fed will keep rates unchanged this month, while pricing in 75 basis points of easing by the end of 2027. Expectations for the European Central Bank have followed a similar trajectory.

The US dollar index rose 0.26% to 102.05.

YEN ROUGHLY UNCHANGED WITH RATES, FISCAL SPENDING IN FOCUS

Against the yen , the US dollar was up 0.05% at 158.15 yen as Bank of Japan Governor Kazuo Ueda said on Monday underlying inflation is "quite close" to the central bank's 2% target, signalling scope for further rate increases.

However, concerns that Prime Minister Sanae Takaichi's spending plans could exacerbate Japan's already heavy debt burden continued to weigh on sentiment.

Against the Chinese yuan , the US dollar was down 0.05% at 6.6815 in offshore trading, the greenback's weakest level since June 2022, after data released on Monday showed Chinese gross domestic product for the third quarter grew slightly more than expected.

In Southeast Asia, the Indonesian rupiah extended declines into a fourth day following a threat from index compiler MSCI to downgrade the country's stock market from its flagship emerging markets index to "standalone" status last week, which triggered an 11.6% collapse in equities. The rupiah slipped 0.2% to around its weakest level in almost three months on Monday.

The Australian dollar appreciated 0.4% to $0.6971,.