Global Markets React to Political Uncertainty and Inflation Data: Euro Declines, Dollar Surges, and Commodity Prices Rise
The euro is on track for its largest monthly drop since January, impacted by political uncertainty leading up to France's general elections. Yet, the dollar has surged to a near four-decade high against the beleaguered yen, ahead of critical inflation data.
Investors fear that a new French government might escalate fiscal spending, which could undermine the sustainability of France's public debt and destabilize the eurozone's financial system. This concern has driven the risk premium on French government bonds to its highest level since 2012, just ahead of the first round of voting in the country's parliamentary elections. There is apprehension that a coalition led by either far-right or far-left parties could increase fiscal spending.
The dollar is set for a second consecutive quarterly gain, reaching a near four-decade high against the yen. Traders are cautiously probing Japan's determination to defend its currency while awaiting crucial U.S. inflation data. During the political landscape, Republican U.S. presidential candidate Donald Trump launched a series of sometimes inaccurate criticisms against President Joe Biden in their first campaign debate in Atlanta. The dollar strengthened as Biden stumbled over his words in several early exchanges.
Core inflation in Tokyo accelerated in June, but this has done little to strengthen the yen. Persistently low Japanese interest rates have encouraged the selling of yen for higher-yielding currencies, despite rising Japanese yields and official warnings of possible currency intervention. Japan has replaced its top currency diplomat, Masato Kanda, with financial regulation expert Atsushi Mimura. Finance Minister Shunichi Suzuki expressed deep concern over the impact of "rapid and one-sided" movements in the yen.
Gold prices are edging higher ahead of key U.S. inflation data, supported by recent jobless claims figures that suggest a softening labor market. This has raised hopes that the Federal Reserve might soon begin to cut rates. Moreover, safe-haven demand has surged in recent weeks amid a challenging political environment. Upcoming elections in France, the U.K., and the U.S. are fueling concerns over potential policy changes.
Oil prices are climbing on the anticipation that the U.S. central bank will soon start cutting interest rates and due to growing fears of an expanded conflict between Israel and the Iran-backed militia group Hezbollah.