FOREX-Euro slips ahead of central bank meetings, real tumbles

The euro fell against the dollar on Monday ahead of a busy week of central bank meetings and with crude oil prices remaining elevated, while the Brazilian real tumbled following a surprise election victory by President Luiz Inacio Lula da Silva. The euro ‌was pressured last week as a selloff in French government bonds drove the country's debt risk premium to its highest level since the 2011 sovereign debt crisis, reigniting concerns about renewed financial stress across the euro zone.

However, French government bond (OAT) prices rose on Monday after Moody's spared France a credit rating downgrade last week, easing pressure on a government struggling to shore ‌up strained finances. The euro was down 0.21% against the dollar at $1.1179 but up 0.31% at 176.04 versus the yen.

"The fundamental issue with the euro hasn't changed and spreads have ‌tightened," said Kit Juckes, chief global FX strategist at Societe Generale. "Euro is still vulnerable at this point because the growth outlook isn't good and energy prices are still elevated." Brent crude futures eased but still held near six-month highs. Elevated oil prices weigh on import-dependent economies such as the euro zone. Brent fell 0.78% to settle at $115.81 per barrel.

The dollar has been supported by resilient US economic indicators, notwithstanding headwinds including rising inflation. The US ⁠currency came ​under selling pressure during a tech-led market selloff ⁠last week. Five major central banks will announce policy decisions later in the week. The US Federal Reserve, the European Central Bank and the Bank of Japan are all expected to hold rates steady despite inflation pressures.

New ⁠Zealand's and Canada's central banks are expected to raise rates this week. The Japanese yen fell 0.43% to 157.46 per dollar.

The dollar index, which measures the US currency against a basket of peers, was ​up 0.31% at 102. "The dollar is doing less well than expected and has some headwinds but US economic data has been pretty resilient," Juckes said.

REAL TUMBLES The Brazilian ⁠real fell sharply against the US dollar after Lula won a historic fourth term on Sunday against Senator Flavio Bolsonaro, who is also the eldest son of former President Jair Bolsonaro.

Bolsonaro led the election's first round but lost ⁠in ​the runoff by over 4 million votes, rattling Brazilian financial markets, which had bet on his victory. He has refused to concede defeat and promised to ask for the result to be annulled. "While the risk of a more prolonged contesting of the election results has a negative impact on market sentiment, more fundamentally we think a greater degree ⁠of fiscal premium should be reflected in BRL and other local assets, especially as substantial fiscal easing has taken place over recent weeks," said Goldman Sachs analysts led by Teresa ⁠Alves in an investor note.

"In our prior benchmarking ⁠of potential USD/BRL levels under more negative fiscal outcomes, we established 5.40 as a level consistent with the fiscal premium embedded in September 2024 (before additional fiscal measures were announced in November) and 5.80 as a level consistent with a greater degree of fiscal premium, akin ‌to December 2024." The real ‌was down 8.5% at 5.4 per dollar.