The euro fell against the pound and the dollar in morning trading as political fears come increasingly into focus.
The euro fell as low as $1.0641 against the US dollar, its lowest point since the end of January. Meanwhile the pound rose against the euro to highs of €1.1751.
Recent turmoil in the right wing Republican party in France has raised investor perception of an increased risk of a victory for Marine Le Pen in the upcoming Presidential election. The Republican candidacy of Francois Fillon has been rocked by allegations his Welsh-born wife, Penelope, received hundreds of thousands of euros in payment without carrying out any work.
Le Pen, the far-right Front National candidate, is staunchly anti-euro, and her election, although still seen as a distant possibility, would almost certainly cause the collapse of the single currency.
In recent weeks French government bonds yields have risen relatively more than German bonds, with spreads (indicating a premium demanded by investors) reaching four-year highs.
The French election is one of several events in what analysts have identified as a risk-filled year for the Eurozone. Far-right challengers are expected to perform well in Dutch and German elections, while renewed concerns about the Greek debt crisis prompted yields on Greek government bonds to rise.
Connor Campbell, an analyst at Spreadex, said: “Given Brexit and Trump it has been a while since the Eurozone has been given so much attention. Yet with Draghi disappointing the euro on Monday, an anti-EU presidential campaign from Marine Le Pen and, perhaps most pressingly, the re-emergence of the debt crisis in Greece the region is having a largely negative return to the spotlight.”
Read more: Greek bond yields jump on IMF board battle
The dollar index, which is heavily weighted towards the euro, rose.
The dollar has been strengthened over the past two days after, Patrick Harker, president of the Philadelphia Fed, said a March interest rate increase was “on the table”.
Markets are currently pricing in only an 8.9 per cent chance of a rate increase at the Federal Reserve’s next meeting on 15 March, according to CME’s FedWatch tool.
Interest rate rises generally cause the nation’s currency to appreciate as a tighter supply of money flowing into the economy makes currency more valuable.
The rise in the dollar prompted the pound to dip below $1.25 in morning trading. However, the rise in the dollar failed to drive gains on the FTSE 100, which was flat at the time of writing.