The Euro Is Near a 17-Month Low. Here's Who Gains and Who Pays.
EUR/USD is near a 17-month low as French fiscal fears outweigh weak US jobs data. Here's who benefits and who absorbs the cost.
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Weak US jobs numbers should have been good news for the euro. It fell anyway.
EUR/USD slipped to around 1.1220 in early Asian trading on Tuesday, close to its weakest level against the dollar in 17 months. The cause isn't in Washington. It's in Paris.
Why the euro is falling
France is trying to get its public finances under control, and investors aren't convinced it can. Prime Minister Sébastien Lecornu's minority government has set out a €54 billion savings drive meant to bring the budget deficit down from 5.5% of GDP this year to 5% next year. Lecornu has warned that without action, the gap could reach 6.5%. With a presidential election due next year, markets doubt the plan will hold. CNBC reports French borrowing costs have climbed alongside the currency's slide.
Spain is adding to the pressure. Prime Minister Pedro Sánchez has called a snap election for November 29 after lawmakers rejected his housing proposals.
"France is the epicentre of the concerns," said Kathleen Brooks, research director at XTB, with Spain's early vote adding to investor worries.
Meanwhile, the dollar had every reason to weaken. The US added just 29,000 jobs in September against a forecast of 84,000, and unemployment rose to 4.2%. Markets now put the odds of a Federal Reserve rate hike this month at roughly 23%, according to the CME FedWatch tool. The euro dropping against that backdrop shows how much weight Europe's problems are carrying.
Who gains
Eurozone exporters. Their goods get cheaper for buyers paying in dollars, and dollar revenue is worth more when converted home.
US companies buying in Europe. Suppliers, contractors, and acquisitions priced in euros all cost less.
Businesses with dollar income and euro costs. Payroll and overheads in Europe take a smaller share of revenue.
Who pays
Eurozone importers. Energy and commodities are largely priced in dollars, so the bill goes up.
US companies selling into Europe. Euro sales convert into fewer dollars, which hits reported revenue.
European consumers. Higher import costs feed into prices at a time when Bundesbank President Joachim Nagel says upside risks dominate the inflation outlook.
What to watch next
France's budget. Whether a minority government can get €54 billion in savings through parliament.
Spain's election on November 29. A messy result means more uncertainty.
The Fed's October meeting. A hold would normally help the euro. So far it hasn't.
The ECB. Strategists at Brown Brothers Harriman point out that the central bank's bond-market backstop depends on countries running sound fiscal policy, a test France may struggle to pass. A rescue isn't guaranteed.
For any business with euro exposure, the takeaway is that this slide is being driven by politics, not the economic cycle. Politics doesn't resolve on a schedule, so it's worth knowing exactly where your exposure sits.