FOREX-Euro struggles as it faces political, fiscal reckoning

Updates to Asia afternoon

By Rae Wee

SINGAPORE, Oct 6 (Reuters) - The euro languished near a 17-month low on Tuesday, weighed down by political uncertainty and fiscal concerns across the euro zone, while the dollar extended its blistering rally as it rode US Treasury yields higher.

The euro EUR= inched down to $1.1219 in Asia, having slid to its lowest since May 2025 in the previous session and extending its 1.2% fall from last week.

It was last at 84.87 pence EURGBP=, having also lost more than 1% against the British pound last week.

The common currency has come under pressure due to worries about high debt levels and political gridlock in France, with an upcoming snap election in Spain adding to headwinds.

A sliding euro is also the latest alarm bell for policymakers as surging French borrowing costs ripple across the broader euro area.

"We're pretty pessimistic about the euro. We think it's going to go down to under $1.10," said Joseph Capurso, a strategist at Commonwealth Bank of Australia.

"We're not surprised that we've seen this weakness... For the euro to rise, you'd need a big decrease in oil prices... a big increase in expectations for European monetary policy tightening. Another one would be them starting to get their act together on reining in the budget deficit, though I think there's no chance of that happening anytime soon," Capurso added.

In the broader market, the dollar marched higher, drawing support from still-elevated US Treasury yields, which scaled multi-decade highs overnight.

Sterling GBP= slipped 0.06% to $1.3216, and against the yen, the dollar rose 0.18% to 158.16 JPY=.

The Bank of Japan may signal this month that underlying inflation has roughly hit its 2% target, three sources familiar with its thinking said, highlighting its readiness to raise interest rates again in the coming months.

The dollar index =USD firmed at 102.17, having scaled an 18-month high in the previous session.

The greenback's 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. 0#USDIRPR

"Although inflation revisions and data reduce the urgency to tighten, cost pressures still fuel doubts that conditions are in place to sustain 2% inflation," said analysts at Barclays in a note.

Data on Monday showed the US services-sector activity slowed in September, with strong domestic demand stretching supply chains and raising prices paid by businesses for inputs, indicating that inflation could remain high into next year.

Elsewhere, the Australian dollar AUD= was little changed at $0.6971, while the New Zealand dollar NZD= eased 0.05% to $0.5597.

(Reporting by Rae Wee; Editing by Muralikumar Anantharaman and Shri Navaratnam)