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US Dollar strengthens as French budget tensions weigh on Euro

The Euro weakened against a higher US dollar on December 2, due to political unrest in France sparking investors’ concerns. This uncertainty over France’s fiscal policies and politically associated instability is causing risk aversion in the market.

France's Political Crisis Intensifies

The euro fell by 0.55%, trading at $1.0515 as the RN, part of French President Emmanuel Macron’s parliamentary coalition said it will support a vote of no-confidence against the government. According to a December 02 report by Reuters, RN President Jordan Bardella declared, “Unless there is a last-minute miracle,” the party shall back the motion in the coming days.

This development stems from the disagreements that now characterize the French government on the amount of money that should be provided to finance its activities. Meanwhile, the fluctuations in the political situation in France have triggered more worries about the stability of the country’s economy hence increasing the flow of investors’ risk to safer money, like the US dollar.

Bond Risk Premium Hits 12-Year High.

France’s government bond risk premium rose to the highest level in over 12 years last week. Market participants are expecting higher risk due to being stuck with the budget which has increased concerns on fiscal issues. However, rising yields on government bonds are up indicating growing scepticism over the economic prospects of France.

This activity in France opposes the relatively strong picture in the USD. The US dollar index also gained 0.46% to 106.28, bolstered by strong economic indicators and its status as a ‘safe-haven’ currency amid global volatility.

Market Impact

The political changes in France are coming at a time when the eurozone is facing slow growth and inflation rate. More worryingly, a sustained decline in the euro channel further indicates a potential for complicating the process of the European Central Bank’s monetary policy decisions.

Now, expectations are high regarding the next step that the French government will make as political risks increase and markets prepare for the storm.