By Amanda Cooper

LONDON (Reuters) -The euro edged up on Tuesday, regaining some poise after political turmoil in France sent traders scrambling for hedging protection against further price swings, while the yuan hit a 13-month low on tariff risks and weakness in China’s economy.

The yen, which has gained nearly 4.5% in the last two weeks, retreated slightly against the dollar, but remained near six-week highs, as traders are growing increasingly confident that Japan may hike rates this month.

The euro, which had been the weakest G10 currency through November, began this month with a 0.7% fall on Monday and was last hovering at $1.0487, as France’s government heads for collapse over a budget impasse. [EUR/GVD]

French Prime Minister Michel Barnier faces a vote of no confidence on Wednesday after fierce opposition from across the political spectrum to his budget, which contains painful tax rises and spending cuts aimed at repairing the country’s precarious finances.

Demand for hedges, as reflected by euro options volatility, has hit its highest since March 2023 this week and, with the combination of a string of weak data, political uncertainty in major euro zone economies and the seemingly unstoppable dollar, the single European currency could struggle.

“There is just so much going against the euro at the moment…the list of headwinds is just growing longer by the day,” City Index market strategist Fiona Cincotta said.

“Today, you’ve got political instability in France, obviously and even in Germany, it’s rumbling and there’s sort of a sense of unease in that you’ve got the weak economic outlook,” she said.

In the last month, the euro has lost 3% against the dollar and more than 1% against both the pound and the Swiss franc.

DOLLAR RESTING, FOR NOW

The dollar typically suffers seasonal weakness in December as companies tend to buy foreign currencies. However, traders are keeping a wary eye this year on President-elect Donald Trump’s incoming administration and supporting the greenback.

Over the weekend, Trump threatened punitive tariffs unless BRICS member countries committed to the dollar as a reserve currency.

“The remarks strengthen the view that Trump may not look to weaken the dollar during his presidential term and will instead be relying on tariffs to tackle the U.S.’s large goods trade imbalance,” Rabobank strategist Jane Foley said in a note.

“We maintain the view that euro/dollar could drop to parity around the middle of next year. The timing may coincide with the introduction of new tariffs by Trump.”

Story Continues