The euro fell against the U.S. dollar on Tuesday as political turmoil in France continued, while the Japanese yen extended its losses to hit a two-month low, pressured by political developments in Japan following Sanae Takaichi’s victory as head of the ruling party. Meanwhile, the euro slipped 0.4% to $1.1668, as markets awaited comments from European Central Bank (ECB) officials, who kept the door open for further rate cuts to support slowing economic activity.
In Paris, intensive talks are set to begin today between resigned Prime Minister Sébastien Lecornu and members of several parties, following his unexpected resignation on Monday. Uncertainty remains over his role during the transition period. The resignation came after widespread rejection of his proposed cabinet by both allies and opposition parties, despite being appointed by President Emmanuel Macron only in September making his administration the shortest lived in modern French history and adding to the political uncertainty in one of the eurozone’s largest economies.
Across the Atlantic, investors are awaiting Federal Reserve remarks, though the ongoing U.S. government shutdown and delayed economic data releases are limiting expectations of any major policy shift. Market pricing tools suggest the Fed could deliver another 25-basis-point rate cut at its meeting later this month, following a similar move in September.
The U.S. Dollar Index rose 0.3%, extending modest gains from the previous session. Analysts at ING noted that the minutes from the Fed’s September meeting, set for release on Wednesday, could prove the week’s most impactful event for currency markets.
The U.S. dollar has also lost much of its safe-haven appeal since Donald Trump returned to the White House, with the index down roughly 11% so far, despite recent attempts at recovery. Analysts at Morgan Stanley believe the weakness has not yet run its course, projecting the greenback could fall toward 91 by mid-2026, amid persistent political uncertainty and shifting global capital flows away from the U.S. currency.
According to the bank’s latest note, policy ambiguity is driving foreign investors to increase their FX-hedging ratios, adding further downward pressure on the dollar. Despite steady inflows into U.S. assets and strong demand for Treasurys, widening risk premiums, narrowing interest-rate differentials with other major economies, and renewed debate over the dollar’s global reserve status are seen as key obstacles to any sustained rebound.
Morgan Stanley analysts argue that the dollar’s golden phase has temporarily passed, noting that the coming period will require tighter defensive strategies focused on risk management and currency hedging. As the dollar enters the final stretch of 2025 amid a turbulent global backdrop, the bank expects the DXY index to remain under persistent pressure, trending toward 91 by mid-2026, as U.S. growth slows, rates converge with global peers, and hedging flows rise all of which could further erode the dollar’s safe-haven reputation in the months ahead.
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