Euro faces energy shock and European political risk against the dollar

The euro’s fortunes against the dollar are being shaped by a global energy shock and growing political risk in Europe, Reuters reported from London on 29 September.

Soft September for the single currency

After heading toward $1.20 in August, the euro has fallen around 2% this month to two-month lows just below $1.14. A US rate rise that has bolstered the Federal Reserve’s inflation-fighting credentials has supported the dollar, while renewed oil strength and European politics have muddied the euro outlook.

European gas prices have topped €80 per megawatt hour this month — the highest since late 2022 — after the Iran war choked liquefied natural gas shipments through the Strait of Hormuz. Analysts say softer gas prices would be needed for the euro to resume a sustained ascent; some commodity forecasters see European gas in an €85–100 range, which RBC BlueBay’s Kaspar Hense said could push euro/dollar toward $1.12.

France, Germany and options markets

The premium investors demand to hold French 10-year bonds over Germany has shot above 110 basis points, a warning sign for the euro. Bank of America FX strategists estimate every further 10 bps of widening is associated with about a 0.4% fall in euro/dollar. Three-month euro risk reversals last week posted their biggest weekly fall since the start of the Iran war, Reuters said, as options traders turned more negative.

Rabobank’s Jane Foley flagged questions about how long euro-area growth resilience can last through winter amid messy politics, while ING said it was keeping a $1.16 year-end euro/dollar forecast if central banks stay hawkish.