SINGAPORE, Oct 6 - The euro hovered near a 17-month low on Tuesday as political uncertainty and fiscal strains across the euro zone continued to weigh on the currency, while the U.S. dollar extended its recent rally amid firmer U.S. Treasury yields.
In early Asian trading the euro eased to $1.1220, after having fallen to its weakest level since May 2025 in the prior session and extending a 1.2% decline from last week. The single currency was last at 84.83 pence, following a more than 1% loss versus the British pound over the previous week.
Market participants flagged high debt burdens and political deadlock in France as key sources of pressure on the euro, with an impending snap election in Spain adding to the headwinds. Observers also pointed to a notable rise in French borrowing costs, a trend that has begun to spill over into wider euro-area funding rates and become an increasing concern for policymakers.
"Were pretty pessimistic about the euro. We think its going to go down to under $1.10," said Joseph Capurso, a strategist at Commonwealth Bank of Australia. "Were not surprised that weve seen this weakness... For the euro to rise, youd 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 theres no chance of that happening anytime soon," he added.
Across global markets the U.S. dollar advanced, supported by U.S. Treasury yields that climbed to multi-decade highs overnight. The dollar strengthened slightly against the yen to 157.92 and the U.S. dollar index firmed at 102.16, after hitting an 18-month high in the previous session. Sterling slipped to $1.3222, down about 0.02% in the same window.
Analysts noted that the greenbacks gains came despite diminished expectations for a Federal Reserve rate increase this month following softer-than-anticipated U.S. jobs data. Investors nonetheless continue to price in additional policy tightening, as persistent cost pressures keep the outlook for inflation uncertain.
"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, highlighting the mixed signals from recent economic releases.
Data released on Monday showed U.S. services-sector activity slowed in September, while robust domestic demand stretched supply chains and pushed up prices paid by businesses for inputs, a development that could keep inflationary pressures elevated into next year.
Elsewhere in currency markets, the Australian dollar eased 0.07% to $0.6967 and the New Zealand dollar fell 0.07% to $0.5596.
Market context and implications
- Political and fiscal uncertainty within the euro area has contributed to renewed pressure on the euro and rising borrowing costs in parts of the bloc.
- The U.S. dollar's rally is being reinforced by higher U.S. Treasury yields even as near-term Fed rate expectations have moderated following recent jobs data.
- Input-cost pressures in the U.S. services sector suggest inflation risks remain a focus for markets and policymakers.