US Dollar Gains as Euro Struggles Ahead of French Political Crisis

The US dollar strengthened on Wednesday, while the euro retreated ahead of a critical no-confidence vote in France that could potentially destabilize the already fragile coalition government.

Dollar Rises on Safe-Haven Demand

At 04:45 ET (09:45 GMT), the Dollar Index, which tracks the greenback against a basket of six major currencies, rose by 0.1% to 106.465. The dollar has been in high demand as a safe-haven asset amid ongoing political turmoil in South Korea and Europe, as well as continued geopolitical tensions in the Middle East and Ukraine.

Analysts at ING noted that the combination of political instability in both Germany and France, coupled with heightened geopolitical risks, has increased the attractiveness of the US dollar, particularly given its relatively high interest rates and liquidity. “The dollar remains the most compelling currency to park cash balances right now,” they added.

The market is also awaiting key economic data, including the ADP private payrolls report for November, which will provide insights ahead of the more widely watched jobs report due on Friday. In addition, the ISM services activity release and a speech from Federal Reserve Chair Jerome Powell are expected to provide further clues about the future direction of US monetary policy. Market-implied odds of a 25 basis point rate reduction by the Federal Reserve on December 18 stand at 75%, according to CME’s FedWatch Tool.

Euro Faces Pressure from French Political Instability

Meanwhile, the euro struggled, with EUR/USD dropping 0.1% to 1.0501, pressured by the deepening political crisis in France. Lawmakers are set to vote on no-confidence motions that are expected to topple Prime Minister Michel Barnier’s government. Barnier’s recent budget proposal, aimed at addressing France’s large budget deficit, has failed to garner support from opposition parties, exacerbating the country’s political instability.

Earlier economic data added to the euro’s woes, with business activity across the eurozone showing a marked decline in November. The final composite Purchasing Managers’ Index (PMI) for the region, compiled by S&P Global, fell to 48.3, down from 50.0 in October, signaling contraction in both the services and manufacturing sectors.

Sterling Steady Amid Positive Economic Data

The British pound held steady, trading 0.1% higher against the dollar at 1.2677, bolstered by data showing continued expansion in UK business activity. Bank of England Governor Andrew Bailey reiterated in a Wednesday interview that gradual interest rate cuts are expected over the next year, with inflationary pressures continuing to ease. This dovish stance from the BoE supported the pound’s resilience.

With US economic data and central bank speeches on the horizon, the focus remains on the dollar’s continued strength, driven by its safe-haven appeal and expectations of tight US monetary policy. Meanwhile, the euro faces challenges from political instability in France and weaker-than-expected economic indicators across the eurozone.