The euro edged lower against the U.S. dollar on Tuesday as markets digested the escalating political crisis in France, while the yen dropped to a two-month low amid speculation over who will join Sanae Takaichi’s cabinet following her recent election as leader of Japan’s ruling party.
In France, two days of urgent negotiations between outgoing Prime Minister Sébastien Lecornu and representatives of various political factions were set to begin Tuesday. However, it remained unclear what role Lecornu—who unexpectedly resigned on Monday—will play in the discussions.
The political upheaval has left France, one of Europe’s biggest economies, facing renewed instability. Lecornu’s government, which was formed only in September under President Emmanuel Macron, collapsed after both allies and opponents rejected his cabinet picks on Sunday evening, making it the shortest-lived administration in modern French history.
By 04:49 ET (08:49 GMT), the euro was down 0.4% at $1.1668, as traders also looked to comments from European Central Bank officials keeping open the door to possible future rate cuts.
Attention is also turning to Federal Reserve policymakers, though analysts say the extended U.S. government shutdown has delayed key data releases, leaving little room for a change in interest rate expectations. The Fed is widely expected to cut rates by 25 basis points later this month after already lowering them in September, according to the CME FedWatch Tool.
The U.S. Dollar Index, which tracks the greenback against a basket of major currencies, rose 0.3% after modest gains on Monday. Analysts at ING said the release of the Fed’s September meeting minutes, due on Wednesday, could have “the greatest market impact potential” this week.
Yen weakens further as Takaichi victory shifts outlook
The Japanese yen extended losses against the dollar, with USD/JPY climbing 0.3% to 150.81. The pair had already surged nearly 2% on Monday, following Takaichi’s victory in the Liberal Democratic Party leadership race, which clears the way for her to become Japan’s next prime minister.
Known for advocating aggressive fiscal stimulus, Takaichi has previously criticized the Bank of Japan’s rate hikes as “stupid” and expressed support for looser monetary policy.
Following her win, investors quickly scaled back expectations for additional tightening from the central bank.
“Her election was somewhat of a surprise, and the yen’s 2% drop versus USD is a testament to that,” analysts at ING wrote in a note.
However, they added that they see limited upside for USD/JPY, arguing that a weaker yen could exacerbate inflationary pressures and strain relations with Washington. The analysts expect a break above 150 to be temporary, rather than the beginning of a sustained rally.
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