Euro Weakens as Dollar Gains on Fed Tightening Expectations

The euro extended its decline, falling below the $1.115 level and approaching its October multi-month lows, as the US dollar remained supported by expectations of further Federal Reserve tightening in December. The recent decline in oil prices also lost momentum, with Brent crude stabilizing following shipping attacks in the Strait of Hormuz. Meanwhile, markets continued to assess hotter-than-expected US inflation data, which reinforced expectations of another Fed rate increase in December and raised the possibility of a 50-basis-point hike. In Europe, persistent political and fiscal challenges in France, alongside uncertainty surrounding the possibility of an early departure by ECB President Christine Lagarde, continued to undermine market sentiment. On the monetary policy front, ECB Chief Economist Philip Lane indicated that another rate increase in December could be justified, adding to the growing number of policymakers signaling support for a third rate hike this year.

The euro slipped below $1.12 as hawkish remarks from Federal Reserve Governor Christopher Waller and stronger-than-expected US inflation data boosted the dollar. This followed a recent recovery in the common currency, supported by easing AI and Middle East concerns and falling oil prices. The dollar strengthened on Tuesday after Waller signaled the possibility of further rate increases, while October's stronger-than-expected US inflation reinforced expectations of additional Fed tightening in December. Meanwhile, the euro remains under pressure from France's political and fiscal challenges and uncertainty surrounding ECB President Christine Lagarde's potential early departure. The succession race is gaining attention, with Klaas Knot and Pablo Hernández de Cos emerging as potential candidates. On monetary policy, ECB Chief Economist Philip Lane signaled that another rate increase in December may be necessary, adding to growing calls among policymakers for a third hike this year.

The euro rose above $1.12, as falling oil prices supported sentiment and markets stabilized following last week's turbulence. Brent crude fell towards $90 a barrel after US President Donald Trump downplayed the prospect of further strikes on Iran. However, the currency remains under pressure from France's political and fiscal challenges, as well as uncertainty surrounding ECB President Christine Lagarde's early departure. Investors are closely watching the succession race, which is increasingly shaping up as a contest between former Dutch central bank chief Klaas Knot and former Spanish governor Pablo Hernández de Cos, who currently heads the Bank for International Settlements. Both countries have nominated their former central bank chiefs to replace Lagarde in February, with the Eurogroup set to assess the candidates this week. The appointment is part of a broader institutional reshuffle that also involves ECB Executive Board member Isabel Schnabel and Chief Economist Philip Lane.