FOREX-Euro, yen slide for third straight day versus US dollar on political jitters

By Stefano Rebaudo and Gregor Stuart Hunter

Oct 8 (Reuters) - The euro and the yen were headed for a third straight daily loss against the U.S. dollar, pressured by political turmoil in France and expectations of increased fiscal spending in Japan.

Expansive economic policies in Japan and France’s struggle to rein in its fiscal deficit are expected to increase the risk premium investors demand to hold government bonds, weighing on both currencies.

Stocks fell and the dollar firmed on Wednesday while a prolonged U.S. government shutdown catapulted gold spot prices beyond $4,000 per ounce for the first time.

SAFE-HAVEN DEMAND FOR DOLLAR

The greenback also drew some support from safe-haven demand, with betting site Polymarket putting the odds of a U.S. government shutdown ending within the next week at just 26%.

The dollar index =USD, which measures the greenback's strength against a basket of six currencies, rose 0.30% to as much as 98.91, its highest since August 5, as U.S. President Donald Trump threatened to carry out mass firings of federal workers during the standoff.

Investors are also questioning whether the Federal Reserve is prepared to cut rates aggressively. Markets are pricing in around 110 basis points of easing by the end of 2026 — roughly unchanged from a week ago — and see a 92% chance of a 25 bp cut later this month.

Kansas City Federal Reserve Bank President Jeff Schmid on Monday signalled he is disinclined to cut interest rates further.

"With stock indexes near all-time highs, gold prices rallying higher, and corporate bond credit spreads very tight, the case for monetary policy being overly restrictive still looks rather flimsy," said Thierry Wizman, global forex and rates strategist at Macquarie Group.

The euro hit a fresh 1-1/2-month low at $1.1607, and was last down 0.38% at $1.1613.

"While we see risk of the greenback facing potential headwinds next year if Fed independence is questioned, we currently see scope for short-covering in favour of the U.S. dollar based on the high amount of Fed easing that is already in the price, and given the backdrop of geopolitical tensions," said Jane Foley, senior forex strategist at Rabobank.

UNCERTAINTY IN FRANCE, CHANGE IN JAPAN

Analysts warned that a French election could weigh on government bonds and the euro, as a stronger showing by populist parties may cloud visibility on structural reforms and deficit consolidation. French Prime Minister Sebastien Lecornu was due to make a speech at 0730 GMT on Wednesday.

The dollar hit 152.46 versus the yen JPY=EBS, its highest level since mid-February and was last up 0.35% at 152.40.

Takaichi, who surprised markets by winning the ruling party's leadership election over the weekend to become Japan's next prime minister, has left investors wondering whether the protégé of the late Shinzo Abe could usher in similar stimulus policies that may boost stocks but leave the yen fragile.

The kiwi dollar tumbled as much as 1% to lows of $0.5739 NZD=D3 after the Reserve Bank of New Zealand surprised the market with a larger-than-expected 50-basis-point interest rate cut and flagged more easing ahead following the recent deterioration in economic data.

"There's a good chance it can fall below 57 cents," said Joseph Capurso, head of FX, international and geoeconomics research at Commonwealth Bank of Australia.

The offshore yuan fetched 7.1506 yuan per dollar CNH=, 0.1% weaker compared with the previous session.