Euro sinks on French debt worries; yen gains on AI rout

By Karen Brettell

Oct 23 (Reuters) - The euro fell on Friday and was on track for a weekly loss against both the US dollar and the yen as a selloff in French government bonds pushed the country's debt risk premium to its highest level since the euro zone sovereign debt crisis in 2011.

The Japanese yen, meanwhile, was on track for a weekly increase against the greenback as it benefited from safe-haven flows from the selloff in artificial intelligence stocks on Thursday.

The dollar index edged lower on the week, though by less than the euro. Strategists said both currencies came under selling pressure this week, but the euro was hit harder as concerns about growing unrest in France have driven the single currency lower.

France will deploy 70,000 police backed by specialist units for protests on Saturday, Interior Minister Laurent Nuñez said on Friday. Meanwhile, the country faces the threat of a rating downgrade by Moody’s later on Friday.

"The pressure in the European bond market has eased today, but Moody’s review of France’s debt rating late today poses a challenge, and although the Macron government has threatened military assistance to quell the social unrest, more activity is likely this weekend," said Marc Chandler, chief market strategist at Bannockburn Global Forex.

The euro was last down 0.12% at $1.12 , set to end the week 0.35% lower. It fell more sharply against the yen, touching its lowest level since October 2025 at 175.08 yen on Friday . It was last down 0.31% against the Japanese currency and on track for a weekly decline of 1.3%.

The dollar index , which measures the greenback against a basket of currencies including the yen and the euro, rose 0.13% to 101.70 and was headed for a weekly loss of 0.10%.

The yen strengthened 0.18% to 156.45 per dollar and was on track for a weekly gain of around 0.9%, its best week since early September.

"The yen has continued to trade at stronger levels at the end of this week, encouraged by more risk-off trading conditions," said Lee Hardman, senior currency analyst at MUFG.

CENTRAL BANK POLICY MEETINGS IN FOCUS

Traders turn to next week's policy meetings at the Federal Reserve, the European Central Bank and the Bank of Japan. All three are expected to leave rates unchanged, but investors will look for clues on the future path of policy.

Fed funds futures traders trimmed bets on a December hike after Thursday's stock market selloff, though they still see an 81% chance of such a move, according to LSEG data.

Traders see a 66% chance of an ECB hike in December. Investors will scrutinize any hint on the rate outlook after ECB President Christine Lagarde said in late September that a moderate policy response to inflation was appropriate.

Purchasing Managers' Index (PMI) data on Friday showed private-sector growth in the euro zone slowed in October to its weakest pace in four months, hurt by a renewed contraction in France.

"The drop brings the PMIs back in line with other growth indicators, in our view, rather than suggesting downside risks from here," Giada Giani, an economist at Citi, said. "France remains a drag, but the rest of the euro area remains resilient."

In Japan, data on Friday showed annual core consumer inflation exceeded the central bank's 2% target in September for the first time in nine months. The reading points to broadening price pressures and strengthens the case for a near-term rate hike.

Traders are pricing in 59% odds of a BOJ hike in December.