Global Markets Reel as French Unrest Weakens Euro

The global foreign exchange market saw the dollar strengthen significantly at the start of the trading week, primarily at the expense of the euro, amid severe unrest in France. Concerns are focused on potential political paralysis in France, which could hinder the government's ability to implement its planned 54 billion euro budget cuts for 2027, leaving the domestic debt crisis unresolved. The dollar index, measuring its value against major world currencies, rose by 0.5% to 102.5 points. The euro fell by 0.7% to trade below $1.12, while the British pound dropped 0.3% to around $1.32. In Japan, the dollar gained 0.2% against the yen, reaching 158.1 yen.

Locally, the euro experienced a sharp decline against the Israeli shekel, with a more modest movement in the US dollar. The dollar traded slightly above 3.04 shekels, while the euro lost 1% against the shekel, following a similar drop on Friday, and was trading around 3.41 shekels. This currency market movement occurs against the backdrop of a weak US employment report released on Friday. The report indicated only 29,000 new jobs were added in September, with the unemployment rate rising to 4.2%, contrary to expectations of 84,000 new jobs and a 4.1% unemployment rate. August's job addition figures were also revised downward.

Following the US jobs report and other macroeconomic data, investors are now pricing in a 78% probability that the US Federal Reserve will keep interest rates unchanged at its upcoming meeting on October 28th, a significant increase from 36% a week prior. However, expectations for interest rate hikes in December and two more in the first half of 2027 persist. Jefferies strategist Mohit Kumar stated that the firm's base scenario involves one rate hike by the Fed and one by the European Central Bank. He added, "By March, either oil prices will be lower, or if we are wrong and prices remain high, growth will slow." He believes that in either scenario, central banks will not implement all the rate hikes currently priced in by the market.

Matthew Ryan, Head of Market Strategy at Ebury, commented that the dollar is the primary beneficiary in the current environment. He noted that rising US bond yields are increasing the attractiveness of American assets, while a broad sell-off in global bond markets is driving funds into the dollar as a safe haven.