By Harry Robertson and Rae Wee
LONDON/SINGAPORE, Oct 6 (Reuters) - The euro rebounded on Tuesday after falling to its lowest in 17 months in the previous day, as a rally in French government bonds allayed some concerns about stress in euro zone debt markets.
The euro zone's currency climbed 0.5% to $1.127, having slid to its lowest since May 2025 on Monday at $1.116, extending its more than 1% drop from last week.
The move helped push down the dollar index by 0.4% to 101.75 after it touched an 18-month
high of 102.53 on Monday.
Bond markets around the world have been battered in recent months due to expectations of sharp central bank rate hikes as energy prices have jumped due to the US-Israeli war with Iran, as well as concerns about high borrowing.
French debt has been hit especially hard as politicians struggle to cap the budget deficit ahead of a divisive election in 2027, with the selloff on Monday weighing on the euro. The calling of a snap election in Spain added to the headwinds.
Yet a drop in energy prices helped French bonds rally on Tuesday, with the key 10-year yield down more than 0.1 percentage points, helping the euro regain some poise.
ANALYST SAYS MARKET JITTERS EASE
Far-right French presidential candidate Marine Le Pen, who leads the polls, on Tuesday increased her plans to slash spending to €140 billion ($158 billion) from €125 billion in savings originally planned if she wins power in 2027.
"Market jitters have eased somewhat when looking at the current yields on French government bonds," said Commerzbank FX analyst Volkmar Baur. "However, there is a risk that things could turn uneasy again at any time."
The fall in the dollar offered some relief to other currencies, with the pound up 0.4% to $1.328.
However, against the yen, the dollar rose 0.1% to 158.07.
The Bank of Japan may signal this month that underlying inflation has roughly hit its 2% target, three people familiar with its thinking said, highlighting its readiness to raise interest rates again in the coming months.
The US dollar's recent strength has come despite reduced expectations for a Federal Reserve rate hike this month in the wake of weaker-than-expected US jobs data, as investors bet the central bank would still need to tighten policy further.
According to the CME FedWatch Tool, the chance of a hike in October is at around 22%, while odds of at least one hike by December stand at around 85%.
"The euro’s idiosyncratic weakness is still playing a role, and so are global bond yields that keep pushing higher," said Francesco Pesole, currency strategist at ING.
(Reporting by Harry Robertson in London and Rae Wee in Singapore; Editing by Shri Navaratnam and Xevi Fontdegloria)
