The euro fell to six-week lows against the US dollar on Wednesday morning as fears of political chaos stand in contrast to continued bullishness on global stock markets, which reached fresh record highs.
The euro fell to a low of $1.0498 against the dollar today, its lowest since the beginning of January, sending the dollar index (which is heavily weighted towards the euro) to its highest point in a month.
The MSCI all-country world index, which measures the performance of stocks in 46 countries, rose to further all-time highs, following Wall Street higher after US indices reached fresh peaks.
The totemic Dow Jones Industrial Average closed at 20,743.00 points after US traders returned from a national holiday, while the S&P 500, which is used as a measure of US equities by professional investors, rose to close at 2,365.38 points.
US investors have poured money into company shares, rotating out of safer, but lower-yielding, government bonds in anticipation of a big boost from US President Donald Trump’s economic policies.
Trump is expected to give more detail of his policies when he addresses the US Congress on Tuesday.
In contrast, the euro’s weakness continued as investors continue to adjust their portfolios ahead of the French elections.
The spread between French and German 10-year bond yields has continued to grow, widening further to 82.9 basis points on Wednesday, according to Tradeweb.
Yields on benchmark bonds move inversely to prices, with those on bonds from the Eurozone’s two largest economies traditionally moving in lockstep. However, the gap between the two has widened as investors raise the probability of a victory for Marine Le Pen in the upcoming French elections.
Le Pen, the Presidential candidate for the far-right National Front party, has promised a referendum on euro membership for the country. A rejection of the euro by France, one of the pillars of currency union, would likely lead to the end of the project.
Kit Juckes, global strategist at Societe Generale, said: “Political risk is beginning to the euro in earnest, reflected by the euro's trade-weighted value reaching the lowest levels since the US Presidential election.”
The first round of the French election is due on 23 April, before a run-off second round on 7 May. While independent centrist Emmanuel Macron is still beating Le Pen in head-to-head votes, odds on a victory for the far-right candidate have narrowed in recent days.
Juckes said: “So much uncertainty with nine weeks to go until the first round of the election means we will probably see nervousness persist, and undermine the euro across the board.”