The euro and the yen weakened for a third consecutive session on Wednesday, pressured by mounting political instability in France and expectations of looser fiscal policies in Japan.
Analysts said that expansive economic plans in Japan and France’s ongoing struggle to curb its widening fiscal deficit are pushing up the risk premium on government bonds — a trend that continues to weigh on both currencies.
Equity markets slipped and the U.S. dollar gained ground, while a prolonged U.S. government shutdown sent gold prices soaring past $4,000 per ounce for the first time.
Safe-Haven Demand Lifts the Dollar
The greenback also benefited from a flight to safety, as investors sought refuge amid political and fiscal uncertainty. Betting site Polymarket placed the odds of the U.S. government shutdown ending within the next week at only 26%.
The dollar index, which tracks the currency’s value against six major peers, climbed 0.30% to 98.91 — its strongest level since August 5 — after President Donald Trump threatened mass dismissals of federal employees amid the budget standoff.
Market participants continue to debate whether the Federal Reserve will move aggressively with rate cuts. Traders are pricing in around 110 basis points of easing by the end of 2026, unchanged from a week earlier, and expect a 92% probability of a 25 basis-point cut later this month.
Kansas City Federal Reserve Bank President Jeff Schmid signaled on Monday that he remains reluctant to push rates lower.
“With stock indexes near all-time highs, gold prices rallying higher, and corporate bond credit spreads very tight, the case for monetary policy being overly restrictive still looks rather flimsy,” said Thierry Wizman, global forex and rates strategist at Macquarie Group.
The euro touched a six-week low of $1.1607, last trading 0.38% lower at $1.1613.
“While we see risk of the greenback facing potential headwinds next year if Fed independence is questioned, we currently see scope for short-covering in favour of the U.S. dollar based on the high amount of Fed easing that is already in the price, and given the backdrop of geopolitical tensions,” said Jane Foley, senior forex strategist at Rabobank.
France’s Political Risks and Japan’s Policy Shift
Analysts cautioned that the possibility of snap elections in France could add pressure on both the euro and French government bonds, especially if populist parties make significant gains — potentially hindering progress on structural reforms and deficit reduction. Prime Minister Sebastien Lecornu was scheduled to speak at 0730 GMT on Wednesday.
Meanwhile, the U.S. dollar advanced to ¥152.46, its strongest since mid-February, before easing slightly to ¥152.40, still up 0.35% on the day.
In Japan, markets are assessing the implications of Sanae Takaichi’s surprise victory in the ruling party’s leadership race. The protégé of the late Shinzo Abe is expected to adopt a similarly expansionary fiscal approach — a move that could stimulate equities but weaken the yen.
The New Zealand dollar slumped as much as 1% to $0.5739 after the Reserve Bank of New Zealand cut rates by a larger-than-expected 50 basis points and hinted at further easing amid deteriorating economic data.
“There’s a good chance it can fall below 57 cents,” said Joseph Capurso, head of FX, international and geoeconomics research at the Commonwealth Bank of Australia.
The offshore yuan also edged lower, trading at 7.1506 per dollar, about 0.1% weaker than the previous session.
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