Euro heads for fifth straight weekly loss as dollar holds near 18-month highs

The euro is limping toward its fifth consecutive weekly decline, drifting near $1.1200 on Thursday after touching its lowest level since May in earlier sessions. The dollar took a breather but stayed close to 18-month peaks.

The U.S. Dollar Index held firm around 102.30, consolidating after a 0.3% gain on Wednesday. The Japanese yen traded flat to slightly weaker around 158.17 per dollar, trapped between rising global bond yields and domestic fiscal intervention warnings.

French fiscal fears pin the euro down

The single currency's slide reflects a broad liquidation of French sovereign assets that has shaken European debt and foreign exchange markets through the week. France's budget deficit is projected to reach 5.4% of GDP, far above the European Union's 3% limit.

Analysts at DBS said French fiscal headwinds remain the main anchor on the euro, with international investors demanding an elevated risk premium to hold Eurozone exposure.

Bank of France Governor Emmanuel Moulin said on Wednesday that France's fiscal position is "serious," but insisted the remedy must come from domestic budget consolidation rather than European Central Bank intervention. That effectively told markets the ECB will not step in to suppress French borrowing costs artificially.

The selloff has pushed 10-year OAT yields toward 4.90% and blown spreads over German Bunds past 140 basis points, spilling into Italian and Greek debt while keeping the euro pinned to the floor.

"France's widening borrowing premium over Germany reflects concerns about fiscal credibility and the ability to support its debt burden," said Luke Davis, founder and chief market strategist at Bull Market Blueprint.

The ECB will publish the account of its recent monetary policy meeting, and traders will scan the readout for how policymakers weigh rising energy inflation against widening sovereign bond spreads. ECB Chief Economist Philip Lane speaks later in the day, with markets watching for signals on whether tighter financial conditions will limit the need for more rate hikes.

Fed minutes keep the dollar supported

Minutes from the Federal Reserve's September meeting showed a majority of US central bank officials still see inflation as the paramount threat to the macroeconomic outlook. The readout confirmed division over the timing of future moves, but reinforced expectations that the Fed will hold rates steady at its October 28 meeting before a possible 25-basis-point hike in December.

CME FedWatch data shows money markets pricing an 81% probability of an October pause, while expectations for a December rate hike stay firmly above 84%.

"The minutes suggest US financial conditions give the Fed room to keep hiking," said Elias Haddad, global head of markets strategy at Brown Brothers Harriman.

Adding to the dollar's yield advantage, the New York Fed reported that one-year U.S. inflation expectations rose to a three-year high of 3.9% in September, backing the higher-for-longer rate narrative.

Yen's trade surplus fails to lift the currency

Japan's current-account surplus reached ¥4.062 trillion in August, beating the ¥3.19 trillion consensus forecast and underlining a strong external trade balance. The yen still failed to gain traction because Bank of Japan policymakers remain divided over the timing of their next rate hike.

Concerns over prospective fiscal spending packages in Tokyo, plus 10-year U.S. Treasury yields holding above 5.30%, continue to favour the dollar in interest rate differential plays.

A firm dollar and elevated US yields keep pressure on emerging market currencies, including the naira, by widening the return gap between dollar assets and local debt.