The US dollar surged higher as the crisis engulfing the French government deepened, putting pressure on the euro. US Treasury yields fell as traders braced for fresh US data that could affect interest rate forecasts.
In the stock market, US stock futures were little changed, showing a pause in the gains that had just produced the S&P 500's best performance of the month. In Europe, shares of Stellantis NV fell more than 8% after CEO Carlos Tavares resigned from the automaker following a dispute with the board.
The US dollar index strengthened by 0.4%, while the euro fell after France's right-wing party threatened to bring down the government amid a deadlock over the national budget. French bonds and stocks underperformed their European counterparts.
"There is political instability, and securities such as French government bonds are now reflecting that instability," said Ecaterina Bigos of AXA Investment Management. “Political instability creates uncertainty, but more importantly, what will France do to reduce the deficit?”
Meanwhile, US Treasury yields fell as traders awaited the latest data on the US economy that could help shape Federal Reserve policy. The US dollar was further supported by comments from Donald Trump that BRICS countries should not create a currency to rival the US dollar, another reminder of the president-elect’s “America First” agenda.
“President Trump will put pressure on the US dollar with a number of policies such as tariffs and other measures that he has discussed,” said Jun Bei Liu, portfolio manager at Tribeca Investment Partners Pty Ltd.
While the US dollar has strengthened about 2% since the election on November 5, December is typically a month that sees the US dollar weaken. In eight of the last 10 Decembers, the US dollar has suffered losses, often falling victim to year-end portfolio rebalancing and the “Santa Rally” effect that has prompted traders to sell the US dollar for riskier assets such as stocks.
This time, the risk of a sharp price swing is higher, with Trump's social media tweets shaking markets, unnerving traders in a month that also saw nine major central bank policy meetings and a slew of key economic data.
Among the global events in focus this week is Federal Reserve Chairman Jerome Powell joining a planned discussion on Thursday. Data due out on Friday is expected to provide a glimpse into the US jobs market.
The euro fell 0.5%. The single currency could face further weakness after Governing Council member Martins Kazaks told broadcasters that the European Central Bank should continue to cut borrowing costs.
The French budget drama weighed on banking stocks, with Societe Generale SA, Credit Agricole SA and BNP Paribas SA all falling. Oddo BHF strategist Thomas Zlowodzki said the possibility of a government collapse was not factored into French asset prices. He suggested the CAC 40 index could fall 5% and the gap between French and German bond yields could widen further.
