FOREX-Euro, yen slide for third straight day versus US dollar, Fed minutes in focus

By Stefano Rebaudo

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.

Meanwhile, global shares rose on Wednesday, shaking off political drama, while a prolonged U.S. government shutdown catapulted gold beyond $4,000 per ounce for the first time.

FOCUS ON THE FED EASING PATH

Federal Reserve minutes, due later in the session, will test the greenback, with analysts viewing the latest dot plot projections as dovish.

The greenback drew support earlier in the session from safe-haven demand, with betting site Polymarket putting the odds of a U.S. government shutdown ending on October 15 or later at 74%.

The dollar index =USD, which measures the greenback's strength against a basket of six currencies, rose 0.24% to as much as 98.81, after hitting 98.99, its highest since August 5.

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.

"This easing comes at a time when economic activity does not need it, but the labour market may," said Atakan Bakiskan, U.S. economist at Berenberg, referring to a rate 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 new 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 AND 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.

Socialist Party leader Olivier Faure said on Wednesday his party could not back the government's budget plan as it currently stands.

The dollar hit 153.00 versus the yen JPY=EBS, its highest level since mid-February and was last up 0.64% at 152.88.

"The yen will only fall while we remain in an information vacuum, about both the U.S. economy and Japanese government policies," said Kit Juckes, macro strategist at SG Markets.

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 protege 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. It was last up 0.66%.

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