Euro plunges amid French political uncertainty and strong Dollar

The euro collapsed dramatically on Monday, impacted by political upheaval in France following President Emmanuel Macron's demand for an early legislative election. Meanwhile, the dollar held solid ahead of the Federal Reserve's meeting later this week.

Euro drops on Macron's election gamble

The euro fell significantly, reaching a one-month low of $1.07485 during Asian trading hours. This fall followed Macron's surprising decision to call an election to reestablish his power. The decision comes on the heels of significant victories for far-right Eurosceptic nationalists in the European Union election. Despite these increases, an aggregated exit poll predicted that the centre, liberal, and socialist parties would maintain a majority in the European Parliament.

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As of the latest trading, the euro was down 0.44 per cent at $1.0753, representing a year-to-date fall of more than 2.5 per cent against the dollar. The currency also sank to its lowest level against the pound since August 2022 and dipped 0.2 per cent against the yen.

Dollar strengthened by robust jobs report

The dollar's strength was boosted by stronger-than-expected US jobs data announced on Friday. Nonfarm payrolls rose by 272,000 jobs last month, considerably exceeding the 185,000 predicted in a Reuters survey. This report has reduced expectations for Fed rate decreases, implying that the central bank may delay the start of its easing cycle this year.

The dollar index, which compares the US currency to six major rivals, increased 0.18 per cent to 105.25, after reaching a nearly one-month high of 105.30 earlier in the session.

ECB and Fed policy divergence

The European Central Bank (ECB) and the Federal Reserve's opposing monetary policies have put additional pressure on the euro. The ECB began its easing cycle last week, a move that was widely anticipated, but provided little insight into future policy direction as inflation remained over target.

In contrast, the Federal Reserve is expected to hold interest rates steady during its upcoming meeting on Tuesday and Wednesday. Market investors will pay particular attention to Fed Chair Jerome Powell's comments and any revisions to economic estimates. Another important consideration for investors will be inflation data from the United States, which is due on Wednesday.

Charu Chanana, head of currency strategy at Saxo, commented on the situation: "This is adding to the downside pressures for the currency after the ECB kicked off its easing cycle last week, while the Fed may be delaying its rate cuts for now."

Asian markets and Yen movements

Markets in China, Hong Kong, Taiwan, and Australia were closed for holidays, restricting regional trade activity. Meanwhile, the Japanese yen fell to 157.13 against the dollar. The yen stands around a 34-year low, forcing Japanese officials to seek currency support measures.

The Bank of Japan (BOJ) is scheduled to hold its monetary policy meeting on Thursday and Friday. The BOJ is widely expected to keep short-term interest rates between 0 and 0.1%. Reuters reported last week that BOJ policymakers are looking for methods to reduce their bond-buying program and may publish new guidelines.

Sterling holds steady

Sterling traded at $1.27145, having hit a one-week low of $1.2700 earlier in the session.

(With inputs from Agencies)