The euro slipped to a 17-month low against the dollar on Monday, as investors weighed French debt fears and political uncertainty across Europe. The single currency was down 0.13% at $1.1206, extending its 1.2% drop last week, and is now more than 4% lower this year.
The head of the French central bank has warned that the country risks being “strangled by interest rates” if it does not address its deficit. Emmanuel Moulin, governor of the Banque de France, told the Financial Times that the eurozone's second-largest economy could win back investor confidence despite the “serious and worrying” moves on sovereign debt markets in recent days.
France 'not Greece' but must act
“France is not Greece during the eurozone crisis. If it can pass a budget this year to reduce spending and narrow the deficit as the government has proposed, then markets will be reassured by this concrete step of fiscal consolidation,” Moulin said. “If we don't act, there is indeed a risk of being gradually strangled by rising interest rates. We have to remain masters of our own destiny.”
The French government is battling to control its stretched public finances in the run-up to next year's presidential election, with teachers, students, nurses and civil servants protesting against budget cuts. More than 400 schools in France are to be closed on Monday as more protests are planned.
Bond sell-off eases
A sell-off in French bonds, which sent their yields soaring last week, eased on Monday. The spread between French and German benchmark 10-year borrowing costs widened, then tightened again.
Mohit Kumar, chief European economist at Jefferies, said: “French [bond] spreads have tightened in the last two sessions, falling from an intraday high of over 150 basis points to 136bp currently. We don't think that we are in a sovereign crisis. Our fear is that as spreads move above 150bp, we could see some contagion risks not just to other French names, but also onto European peripherals. We have highlighted a number of times that deficit concerns should be a greater risk for investors than near-term inflation. Market is going after the weakest link in the deficit picture which is France and the UK.”
Asian stocks rally, US yields hit highs
Asian stock markets rose, after a rally in technology stocks lifted the Nasdaq on Wall Street to a record close, supported by weaker-than-expected US jobs growth that dampened expectations of an interest rate hike from the Federal Reserve this month. Oil prices also retreated. However, US 10-year and 30-year Treasury bond yields hit fresh 24-year highs overnight.
AI heavyweight Nvidia gained 2.1% to a record closing high, lifting its market value to $5.76tn. MSCI's broadest index of Asia-Pacific shares excluding Japan climbed 1.2%, and Japan's Nikkei added 1.1%.
