Euro faces political, fiscal reckoning as it hovers near 17-month low

The euro faced a 17-month low on Tuesday, grappling with political uncertainty and fiscal challenges throughout the euro zone, while the dollar continued its strong upward momentum, propelled by rising US Treasury yields. The euro dipped slightly to US$1.1220 in the early Asian session, following a drop to its lowest level since May 2025 the previous day, marking a 1.2 per cent loss from the prior week.

It was last at 84.83 pence, also falling by more than 1 per cent against the British pound last week. The common currency has been under pressure due to concerns over high debt levels and political gridlock in France, exacerbated by an upcoming snap election in Spain. A weakening euro has become a cause for alarm among policymakers, who are facing escalating French borrowing costs that have begun to affect the wider euro area.

Analyst Joseph Capurso of Commonwealth Bank of Australia expressed pessimism about the euro's future, predicting it could plummet below US$1.10. He noted that for the euro to strengthen, there would need to be a significant drop in oil prices, a major increase in expectations for European monetary policy tightening, or a significant improvement in their efforts to curb the budget deficit.

However, Capurso emphasized that there is little chance of the latter occurring anytime soon. In the broader market, the dollar gained ground, buoyed by persistently high US Treasury yields, which hit multi-decade highs overnight. Against the yen, the dollar rose marginally to 157.92, while the British pound slipped by 0.02 per cent to US$1.3222.

The dollar index climbed to 102.16, reaching an 18-month peak in the previous session. Despite reduced expectations for a Federal Reserve rate hike this month following weaker-than-expected US jobs data, the greenback's strength persists as investors anticipate further policy tightening from the central bank. Inflation revisions and data have softened the urgency for rate hikes, yet rising cost pressures still cast doubts on whether inflation conditions will remain conducive to maintaining a 2 per cent inflation target.

US services-sector activity slowed in September, driven by strong domestic demand that strained supply chains and pushed up business input prices, suggesting that inflation may stay elevated into the next year. Meanwhile, the Australian dollar slipped 0.07 per cent to US$0.6967, while the New Zealand dollar softened by a similar margin to US$0.5596.