By Stefano Rebaudo
(Reuters) -The dollar struggled for direction on Wednesday while the euro held near its recent lows on concerns that a new government in France could weaken fiscal discipline, raising the debt risk premium across the euro zone.
Meanwhile, the British pound rose after data showed UK services inflation was stronger than expected.
US markets are closed on Wednesday, likely leading to muted trading.
The dollar fell overnight after US retail sales suggested economic activity remained subdued and the Federal Reserve is more likely to cut interest rates.
The euro rose 0.1% to $1.0746; it hit a 1.5-month low of $1.07 on Friday.
The yield gap between French and German government bonds, now seen as a benchmark for the risks of a budget crisis in the heart of Europe, has narrowed slightly since Monday but remained close to last week’s seven-year high.
Analysts pointed out that the single currency is far from posing a serious threat to the financial stability of the euro area bloc.
“The very limited movement in the currency market, in contrast to the spread movement of the OAT (French government bonds), underlines the fact that the reaction is more about a revaluation of fixed income risks,” said Derek Halpenny, head of global markets research at MUFG.
National Rally (NR) leader Marine Le Pen said she lived with President Emmanuel Macron and would respect institutions, raising expectations that North Korea could back away from fiscally expensive commitments as it enters elections July would win.
The European Central Bank could also buy French bonds to prevent “unjustified and disorderly” interest rate spread. Still, ECB chief economist Philip Lane said the recent market turmoil was “not disorderly”.
The European Commission on Wednesday proposed widely expected disciplinary measures against France, Italy and five other European Union countries over excessive budget deficits.
The price was flat at 105.20.
Markets now estimate about a 65% chance that the Fed will begin easing rates in September, according to the CME FedWatch tool, with nearly 50 basis points of cuts expected this year.
Sterling rose 0.1% against the euro to 84.43 pence per euro and 0.13% against the dollar to $1.2725 after British data showed underlying price pressures remained strong.
“What matters now is how many shares the Monetary Policy Committee is making available on the spot – and arguably backward-looking – data,” said Sanjay Raja, chief UK economist at Deutsche Bank Research, recalling that the survey numbers are “more encouraging”.
Markets are estimating about a 25% chance of a Bank of England rate cut in August, down from 50% before the data, and monetary easing of 44 basis points in 2024, down from almost half percentage point before the numbers.
The BoE will hold its policy meeting on Thursday.
The Swiss franc hit a seven-month high against the euro at 0.9479 and was last down 0.1% at 0.9503.
The common currency has steadily weakened against the Swiss currency since late May, when it reached 0.9930 per franc, the highest level since April 2023.
“Some observers see this as a renewed threat of intervention or as an implicit move that (Swiss National Bank Chairman Thomas) Jordan is offering to all market participants who have long positions in the Swiss franc, especially against the euro,” said Ulrich Leuchtmann , main forex. strategy at Commerzbank (ETR:), in memory of a speech by Jordan at the end of May.
Jordan argued that inflation risks would likely be linked to a weaker Swiss franc, which the SNB “could counter by selling foreign exchange.”
The BofA expects the SNB to implement its second cut of 25 basis points next week and declare its willingness to “be active in the foreign exchange market if necessary.”
The Australian dollar rose 0.29% to $0.6675 against the US currency, helped by a hawkish message from Reserve Bank of Australia Governor Michele Bullock after the central bank’s interest rate decision on Tuesday.
The yen was little changed at 157.925 per dollar as it remains under pressure from large interest rate differentials between Japan and the US in particular.
Analysts said monetary tightening from the Bank of Japan was on the horizon, but the BOJ would take a slow approach.
