Dollar sinks as European political worries ease

Political fears eased last week as markets became less apprehensive about the French polls, sending risk assets and the euro up and the dollar down.

The surprise victory by the left in the French National Assembly elections, however, has had little impact on markets so far. Investors seem to balance optimism about the National Front's defeat with worries about the leftist first place, leaving the euro largely unchanged from Friday's close, but significantly higher from the levels just after the calling of the election. More generally, dissipating political risk premia and continued softness in US economic data sent almost every major world currency higher against the US dollar.

Political uncertainty in the US about Biden's candidacy has yet to have a significant market impact. Focus will now shift to political horse-trading in the hung French Assembly, where right, left and centre are all very far from the numbers needed to govern. Attention on the economic front will shift from the apparent slowdown in US economic data to US inflation, as the June report is published on Thursday. Economists optimistically predict another 0.2% monthly increase in the core index that would signal a return to normality and the Fed's inflation targets, and allow the central bank to begin rate cuts after the summer.

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