Euro Weakens Amid French Unrest; Dollar Holds Steady on Fed Pause Bets

The euro retreated from a one-week high on Monday as investors priced in growing political risk from France, where widespread social unrest has erupted. Meanwhile, the U.S. dollar held steady after a weekly loss, with currency markets showing caution amid expectations for a Federal Reserve policy pause.

French Turmoil Hits Euro

The euro was the most notable loser among major European currencies, declining 0.3% to trade around $1.1200. The sell-off follows a weekend of violent protests across France, which have been described as some of the country's most severe social disturbances in decades, leading to thousands of arrests.

This political instability in the Eurozone's second-largest economy is directly impacting investor sentiment. The yield spread between French government bonds (OATs) and German bunds has widened, and the cost to insure French sovereign debt through credit default swaps (CDS) has risen to multi-year highs, signaling heightened risk perception.

Despite the pressure, some analysts see the euro's weakness as excessive. "We expect the euro to recover from its current oversold levels," analysts at UBS wrote. "We believe the market's pessimism towards Europe is overdone. As such, the EURUSD is now weaker than can be explained by relative economic fundamentals."

Dollar Steady as Oil Slides

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The U.S. Dollar Index (DXY), which measures the greenback against a basket of currencies, was nearly flat at 101.87. The index had snapped a four-week winning streak last week, falling 0.4%.

Dollar trading was subdued as markets continue to price in a high probability that the Federal Reserve will not raise interest rates at its next meeting. According to the CME Group's FedWatch tool, money markets are forecasting an 87% chance that the Fed will keep rates unchanged at its two-day policy meeting beginning on October 28.

Easing inflation concerns further supported the case for a Fed pause, as Brent crude oil futures fell 2.3% early Monday. The drop in oil prices came after the U.S. president signed an executive order lifting some sanctions on Russian energy transactions, according to the source report.

Moves in Asia

• Japanese Yen: The yen traded in a narrow range against the dollar, with USD/JPY hovering near the 158.00 level. Traders remain cautious about potential intervention from Japanese financial authorities to support the currency. The yen found some support after Bank of Japan Governor Kazuo Ueda stated that underlying inflation was steadily approaching the central bank's 2% target, reinforcing expectations for gradual policy normalization.
• Indonesian Rupiah: The rupiah fell 0.2% for a fourth consecutive session, hitting a three-month low of over 18,040 per dollar. The decline was triggered by a warning from index provider MSCI that it may downgrade the Indonesian stock market to "Standalone Market" status due to persistent issues with market accessibility and governance. The proposal caused the Jakarta Composite Index to plummet 11.6%, its largest single-day drop since the 1998 Asian Financial Crisis.