Dollar maintains stability, while the euro weakens amid political turmoil in France

Currency markets started the week with relatively quiet trading. The US dollar held steady after last week's decline, while the euro pulled back from a one-week high. Pressure on the European currency is being intensified by escalating political and social instability in France.

The US Dollar Index (DXY) remained nearly unchanged at 101.87 points. The previous week, the index fell 0.4%, breaking a four-week streak of gains. Volatility among major currencies was limited by falling oil prices and expectations that the Federal Reserve (Fed) will keep interest rates unchanged at this stage.

Unrest in France weakens the euro

The euro turned out to be one of the weakest among major European currencies. It gave up some of last week's gains, depreciating 0.3% against the dollar to around $1.1200. The rate fell from the one-week high recorded on Friday, as investors weighed rising political risks in the eurozone's second-largest economy.

The euro's decline was driven by violent protests that erupted in France over the weekend. Demonstrations against the high cost of living and deteriorating public services escalated into unrest, resulting in property damage, looting, and thousands of arrests.

The events have increased pressure on French President Emmanuel Macron. Social discontent in the country continues to grow, deepening concerns about political stability and the economic outlook.

Political risks were also reflected in the French government bond market. French government bonds underperformed compared to German government bonds, while the cost of insuring French sovereign debt — based on credit default swaps (CDS) — stood near a multi-year high. The widening spread between French and German bond yields points to heightened investor caution toward the country's risks and is putting additional pressure on the euro.

Nevertheless, UBS analysts believe the euro could recover from its current, excessively low levels. In their assessment, despite the relative strength of the US economy, the market is being overly pessimistic about Europe's economic outlook. As a result, EUR/USD may be trading lower than economic fundamentals would justify.

Fed decision and oil price expectations

In the US, investors continue to expect the Fed to keep interest rates unchanged for some time. This expectation is limiting the potential for further dollar strengthening.

According to CME Group's FedWatch tool, the market priced in an 87% probability that the Fed would hold rates steady at its two-day meeting beginning October 28.

Concerns over inflationary risks were also eased by falling oil prices. In early Monday trading, Brent crude futures fell 2.3%. The decline followed an exemption issued by US President Donald Trump, who eased sanctions and tariff restrictions on certain operations related to Russian energy. This could increase Russia's share in the global fuel supply.

Cheaper oil reduces inflationary pressure and weakens the need for central banks to maintain tight monetary policy for an extended period. Against this backdrop, the near-term direction of the currency market will depend both on the Fed's decision and on how the political situation in France develops.