Quick overview

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The EUR/USD exchange rate is currently trading at 1.1659, down by 0.4% for the day. The euro has now fallen for three consecutive sessions, moving closer to the lower end of its recent trading range, which is around 1.1600.

The pair remains up around 6 percentage points year-over-year despite this downturn, though it has not changed significantly over the past month.

The main factors contributing to the euro’s decline are domestic challenges in Europe and a recent surge in the US dollar, driven by safe-haven flows amid increasing political risks in the US.

Political instability in France has intensified following the resignation of newly appointed Prime Minister Sébastien Lecornu, just after he formed his cabinet.

This resignation has exacerbated coalition instability and facilitated gains by far-right parties. Meanwhile, Germany’s economic output has dropped to a three-month low, and France’s manufacturing activity has seen its most significant decline since May 2020, raising renewed concerns about governance within the Eurozone.

The dollar nearly reached a two-month high, as concerns about fiscal and economic issues affected the currencies of its Group 10 peers across the Asia Pacific and Europe. The Dollar Spot Index increased by 0.2 percent, nearing its highest level since early August.

Traders in Asia reported that hedge funds were purchasing more bearish options against the euro and yen, contributing to this rise.

In recent days, the US currency has rebounded after dropping to its lowest level in over two years in September. This recovery has been fueled by various unfavorable events abroad, which have overshadowed the negative effects of the US government shutdown.

Political unrest in France has weakened the euro, while the yen has declined amid rumors that Japan’s likely new leader may favor slower interest rate increases and more fiscal expansion.

The dollar gauge has risen nearly 1% since the end of September, although it declined by 7.5% year-to-date. Contributing factors to this decline throughout most of 2023 include the Federal Reserve’s easing policies, a reduction in US exceptionalism, and the growing appeal of gold as a safe-haven investment.

Negative effects are also anticipated from the US government shutdown. The three most recent instances—2013, early 2018, and late 2018 into 2019—saw a decline in the gauge during and immediately following the deadlock. All of this is raising concerns about the dollar’s ability to recover steadily over the upcoming months.