Euro gains after French elections; yen sinks to new 38-year low

One Euro and British pound coins are seen in this illustration taken, November 9, 2021. REUTERS/Dado Ruvic/Illustration/ File Photo

By Harry Robertson and Gertrude Chavez-Dreyfuss

LONDON/NEW YORK (Reuters) -The euro climbed on Monday after a convincing and historic win by the French far right in the first round of parliamentary elections fell slightly short of some expectations, leaving the final result dependent on party deals before a second round next weekend.

Meanwhile, the yen sank to a new 38-year low after data showed Japan's economy shrank more than initially reported in the first quarter, leaving traders on alert for signs of intervention to prop up the currency.

Marine Le Pen's far-right National Rally (RN) party won the first round of France's parliamentary elections on Sunday by a large margin, exit polls showed, although analysts noted it won a smaller share of the vote than some polls had initially projected, triggering a rally in stocks and bonds.

FILE PHOTO: Euro, Hong Kong dollar, U.S. dollar, Japanese yen, pound and Chinese 100 yuan banknotes are seen in this picture illustration, January 21, 2016. REUTERS/Jason Lee/Illustration/File Photo

The euro was last 0.4% higher at $1.0753, having earlier climbed to a two-week high. It has lost around 1.3% since the French far right triumphed in European parliamentary elections in early June, prompting President Emmanuel Macron to call a snap domestic election.

"It's an alleviation of risks. We're seeing a lot of hedges going into the French election getting unwound," said Simon Harvey, head of FX analysis, at Monex Europe in London.

Investors have been concerned that the RN could come to power through "cohabitation" with Macron and push a high-spending and euro-sceptic agenda.

"First round results are not offering much certainty about the composition of the parliament, and the second round scheduled for next weekend is in fact the big risk event," said Francesco Pesole, currency strategist at ING.

Pesole also said the fact that the left-wing coalition, which also wants to boost government spending, did not receive more votes than expected was likely boosting the euro too.

The rise in the euro sent the dollar a touch lower against a basket of currencies, though the greenback was on the back foot after data on Friday showed U.S. inflation cooled in May, cementing expectations the Federal Reserve will begin cutting interest rates later this year.

The dollar index was last flat on the day at 105.72.

Against the dollar, sterling rose 0.2% to $1.2674, while the Aussie was down 0.1% at US$0.6665.

The dollar slipped after data showed after a U.S. manufacturing index fell 48.1 in June, lower than the forecast of 49.1.

U.S. construction spending for May also came in weaker than expected, falling 0.1%, compared with expectations for a 0.2% rise.

Market pricing now points to about a 63% chance of a Fed cut in September, as compared to a 55% chance a month ago, according to the CME FedWatch tool.

YEN UNDER PRESSURE

The yen fell to another 38-year low against the greeenback, sliding to 161.58 yen per dollar. The U.S. currency was last up 0.4% at 161.57.

The yen has fallen more than 12% this year, with its latest decline to the weaker side of 160 per dollar keeping investors on heightened alert for intervention from Japanese authorities to prop up the currency.

"In terms of line in the sand, we have two. We have 163 and if this evolves relatively quickly in the next two to three weeks, I see the Bank of Japan would intervene in the market to purely stem or slow the pace of depreciation," said Monex's Harvey.

"If they don't intervene at 163, then obviously 165 stands out as the next psychological level based on current fundamentals."

Data showing weaker-than-expected economic growth added to the uncertainty about the Bank of Japan's next move in interest rates.

The BoJ meets in late July and has hinted that it could raise borrowing costs, potentially helping close the yawning gap between Japanese and U.S. rates that has hammered the yen this year by causing investors to flock to the higher returns on U.S. bonds.

Separate data on Monday showed the business mood in Japan's service-sector soured in June, offsetting a big lift in factory confidence.

Currency

bid

prices at

1 July​

02:40

p.m. GMT

Descripti RIC Last U.S. Pct YTD Pct High Low

on Close Change Bid Bid

Previous

Session

Dollar 105.79 105.72 0.09% 4.36% 105.82 105.

index 42

Euro/Doll 1.0739 1.0713 0.24% -2.71% $1.0776 $1.0

ar 718

Dollar/Ye 161.53 160.88 0.42% 14.54% 161.56 160.

n 82

Euro/Yen 1.0739​ 172.36 0.63% 11.45% 173.67 172.

61

Dollar/Sw 0.903 0.8988 0.48% 7.31% 0.9032 0.89

iss 84

Sterling/ 1.2656 1.2646 0.09% -0.54% $1.271 $1.0

Dollar 718​

Dollar/Ca 1.3727 1.368 0.37% 3.58% 1.3735 1.36

nadian 6

Aussie/Do 0.6654 0.667 -0.24% -2.41% $0.6689 $0.6

llar 652

Euro/Swis 0.9695 0.9624 0.74% 4.4% 0.971 0.96

s 46

Euro/Ster 0.8482 0.8471 0.13% -2.15% 0.8498 0.84

ling 75

NZ 0.6076 0.6091 -0.24% -3.85% $0.611 0.60

Dollar/Do 76

llar

Dollar/No 10.6617​ 10.6642 -0.02% 5.2% 10.6681 10.6

rway 024

Euro/Norw 11.4499 11.4312 0.16% 2.01% 11.4668 11.4

ay 119

Dollar/Sw 10.6152 10.5908 0.23% 5.45% 10.6174 10.5

eden 41

Euro/Swed 11.4003 11.3525 0.42% 2.47% 11.4006 11.3

en 436

(Reporting by Harry Robertson in London and Gertrude Chavez-Dreyfuss in New York; Additional reporting by Rae Wee in Singapore; Editing by Stephen Coates, Jason Neely and David Evans)