Kevin Buckland and Amanda Cooper
TOKYO/LONDON (Reuters) – The euro recovered overnight losses to stabilize on Thursday, while the dollar weakened, after France’s general election showed signs of a divided government.
The dollar continued to trend lower after Friday’s unexpectedly weak U.S. employment data strengthened expectations that the Federal Reserve will soon start cutting interest rates.
The pound rose to a three-and-a-half-week high against the dollar and euro, surging following last week’s landslide victory for Labour that ended 14 years of Conservative rule.
The Australian dollar benefited from a weaker US dollar, hitting its highest level in six months.
The yen rose above last week’s lowest level against the dollar in nearly 38 years but has since fallen from the day’s highs.
The euro was flat at $1.0828 after falling as much as 0.4 percent as investors considered the impact of a divided French parliament.
It was one of several surprises in the expected result, which also included a likely first place for the left-wing coalition New Popular Front (NFP) and a possible third place for Marine Le Pen’s nationalist, eurosceptic National Rally (RN) party, which was the front-runner at the time of Sunday’s vote.
Polling agencies predicted the left would win 184 to 198 seats, far short of the 289 needed for an absolute majority. President Emmanuel Macron’s centrist coalition was projected to win 160 to 169 seats, while the RN and its allies were expected to win 135 to 143 seats.
“While the shock of a far-right party winning a majority has been averted in the short term, the rise of left-wing parties and increased political uncertainty could raise concerns about France’s budget deficit and euro zone stability in the medium term,” said Ken Cheung, head of foreign exchange strategy at Mizuho Securities.
No significant changes
The euro weakened slightly against the Swiss franc, which had been an early beneficiary of investor concerns about the impact of potential instability in France on the wider euro zone.
The single European currency was last down 0.1 percent at 0.9702 francs, its lowest in a week, but still below last week’s highest level in a month.
“There has been no fundamental change in the political situation in the National Assembly, so we think the election results are unlikely to have any lasting negative impacts,” said Andrzej Szczepaniak, senior macroeconomist at Nomura, adding that the euro/Swiss franc should “move towards parity” over the summer.
The dollar index, which gauges the greenback’s strength against the euro, pound, yen and three other major currencies, was stable at 104.95, after a nearly 1 percent fall last week that was exacerbated by weak U.S. employment data on Friday.
Traders now believe about 76% of investors expect a rate cut at the Fed’s September meeting, up from 64% a week ago, according to CME Group’s FedWatch tool, with any further cuts expected by December.
The dollar was trading at 160.93 yen, up 0.1% from the previous weekend, but still below last week’s high of 161.96 yen.
The pound rose 0.1 percent to $1.2825, its highest since June 12.
The Australian dollar fell 0.1 percent to $0.6741 after briefly rising to $0.67615 for the first time since Jan. 4, in contrast to growing expectations of a near-term interest rate cut by the US Federal Reserve.
(Reporting by Kevin Buckland; Editing by David Evans and David Holmes)
