By Dhara Ranasinghe
LONDON (Reuters) – The euro fell in early Asia trade on Monday, a sign of the unease likely to beset Europe as French President Emmanuel Macron called a shock legislative election after being trounced in the European Union vote by the far-right.
The euro slipped 0.3% to $1.0764, touching its lowest level in around a month, according to LSEG data. The euro also edged lower versus the British pound, dropping 0.35% to 84.60 pence. It touched its lowest levels since August 2022, having fallen to that area in late May.
Eurosceptic nationalists made the biggest gains in European Parliament elections in the Sunday vote while the Greens and liberals lost ground, an aggregated exit poll showed.
In Italy, Prime Minister Giorgia Meloni’s arch-conservative Brothers of Italy group won the most votes, exit polls showed, confirming its status as the nation’s most popular party.
Macron’s surprise decision represents a major roll of the dice on his political future, three years before his presidency ends. If Marine Le Pen’s far-right National Rally (RN) party wins a parliamentary majority, Macron would be left without a say in domestic affairs.
“That is probably somewhat bad news for markets,” said Berenberg chief economist Holger Schmieding.
“It introduces an unexpected element of uncertainty.”
Renewed political uncertainty in the euro zone’s second-biggest economy jolts financial markets in a key election year and at a time of heightened geopolitical risks.
Britain holds a general election on July 4 and crucial U.S. elections take place in November.
WAKE-UP CALL?
While the euro and euro area assets more broadly have been largely cushioned by diminished euro-scepticism compared with elections in the 2010s and early 2020s, the surprise news from France and wins for eurosceptic parties in the EU election could be a wake-up call.
In focus when broader European markets open later on Monday will likely be Italy’s 10-year government bond yield gap over benchmark Germany – often a good barometer of risk appetite in the region.
The spread was at around 133 basis points late on Friday, comfortably below peaks seen last year above 200 bps.
Europe’s broad STOXX 600 share index, which has been trading near record highs, could also be vulnerable.
“Obviously, the snap election is a new source of uncertainty, which should have some negative impact on economic and market confidence, at least in France,” said Jan von Gerich, chief market analyst at Nordea.
But he noted that EU election results do not always translate directly into a domestic parliamentary election result, due to a different election system and typically more protest voting in European elections.
Peter Cardillo, chief market economist at Spartan Capital Securities in New York, said it would take a huge surge to the far right for the euro to weaken substantially.
The euro is down roughly 2.5% against the dollar so far this year, and its path has largely been driven by the relative outlooks for interest rate cuts in the euro area and United States.
The European Central Bank last week delivered its first rate cut in five years.
In France, where concern about the country’s high debt levels have grown this year, the implications of renewed political uncertainty for the economy could also be in focus.
Standard & Poor’s last month cut its rating on France’s sovereign debt, delivering a painful rebuke of the government’s handling of the strained budget days before the EU election.
(Reporting by Dhara Ranasinghe; additional reporting by Stephen Culp in New York; Editing by Elisa Martinuzzi and Lisa Shumaker)
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