The euro and yen fell for the third straight session on Wednesday, pressured by mounting political uncertainty in France and expectations of more aggressive fiscal spending in Japan, which have both eroded investor confidence.
Analysts noted that France’s widening budget deficit and Japan’s stimulus-driven policies are prompting investors to demand higher risk premiums on government debt — a dynamic that continues to pressure both currencies.
Global markets remained cautious, with stocks falling and the U.S. dollar strengthening, while a prolonged U.S. government shutdown drove gold prices above $4,000 per ounce for the first time on record.
Dollar Strengthens on Safe-Haven Demand
The greenback also found support from a wave of safe-haven buying, as investors sought protection amid fiscal and political turmoil. According to betting platform Polymarket, there was only a 26% chance that the U.S. government shutdown would end within a week.
The U.S. dollar index, which measures the currency’s performance against a basket of six major peers, gained 0.30% to reach 98.91, its highest level since August 5, after President Donald Trump threatened mass layoffs of federal employees amid the budget impasse.
Market attention remains focused on the Federal Reserve’s next move. Traders are pricing in around 110 basis points of rate cuts by the end of 2026, nearly unchanged from last week, with a 92% probability of a 25-basis-point cut later this month.
Kansas City Federal Reserve Bank President Jeff Schmid indicated on Monday that he is not inclined to lower rates further.
“With stock indexes near all-time highs, gold prices rallying higher, and corporate bond credit spreads very tight, the case for monetary policy being overly restrictive still looks rather flimsy,” said Thierry Wizman, global forex and rates strategist at Macquarie Group.
The euro slipped to a six-week low of $1.1607, last down 0.38% at $1.1613.
“While we see risk of the greenback facing potential headwinds next year if Fed independence is questioned, we currently see scope for short-covering in favour of the U.S. dollar based on the high amount of Fed easing that is already in the price, and given the backdrop of geopolitical tensions,” said Jane Foley, senior forex strategist at Rabobank.
Political Instability in France, Policy Shifts in Japan
Analysts warned that France’s political landscape could put renewed pressure on government bonds and the euro, particularly if populist parties gain momentum in a potential snap election. Prime Minister Sebastien Lecornu was expected to deliver a key speech at 0730 GMT on Wednesday, which investors hoped might offer clarity.
The U.S. dollar also advanced to ¥152.46, its strongest level since mid-February, before easing slightly to ¥152.40, up 0.35% on the day.
In Japan, investors are digesting the implications of Sanae Takaichi’s unexpected win in the ruling party’s leadership race. A known protégé of the late Shinzo Abe, Takaichi is anticipated to pursue policies that stimulate growth through increased fiscal spending — a move that could support equities but weaken the yen further.
Meanwhile, the New Zealand dollar tumbled as much as 1% to $0.5739 after the Reserve Bank of New Zealand surprised markets with a 50-basis-point rate cut and signaled more easing ahead, citing worsening economic data.
“There’s a good chance it can fall below 57 cents,” said Joseph Capurso, head of FX, international and geoeconomics research at the Commonwealth Bank of Australia.
The offshore yuan also slipped modestly, trading at 7.1506 per dollar, about 0.1% weaker than the previous session.
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