French presidential debate lifts euro to six-week highs

[March 21, 2017]  By Dhara Ranasinghe

LONDON (Reuters) - The euro climbed to six-week highs and sentiment toward French assets was lifted on Tuesday after centrist Emmanuel Macron's performance in a television debate boosted a view he would win France's presidential race over the far-right's Marine Le Pen.

The dollar was also held back by doubts about how fast U.S. interest rates would rise. Oil prices rallied on talk that OPEC could extend supply cuts.

European stock markets were broadly firmer, with the exception of London's blue-chip stock index which turned negative after stronger-than-expected British inflation data boosted the value of sterling.

U.S. stock index futures traded higher, pointing to a positive start on Wall Street ahead of speeches by a host of Federal Reserve officials. In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan hit 21-month highs, supported by signs of strong global growth.

France's turbulent presidential campaign remained in focus for global investors, who have been concerned about the potential for a populist backlash following last year's surprise votes for Brexit in Britain and for Trump in the United States.

A Harris Interactive poll on Tuesday showed that centrist Macron had been the most convincing candidate in Monday's first French TV presidential debate, adding weight to two other polls that reached a similar conclusion.

The debate, and two others that will follow before the April 23 first round, are considered crucial for an election in which nearly 40 percent of voters say they are not sure who to back.

"From the point of view of international investors, this is a positive as it keeps France's position in the euro zone secure, or at least not weaker," said DZ Bank analyst Rene Albrecht.

Macron's presidential bid gathered pace on Tuesday after a junior minister said she would back his campaign, becoming the first member of the government to do so.

The prospect of anti-euro, far-right candidate Le Pen delivering a surprise election win has rattled French bond markets this year.

But on Tuesday the premium investors demand for holding French 10-year government bonds over German ones <FR10YT=TWEB> <DE10YT=TWEB> narrowed to as much as 63 basis points from Monday's 68 bps, a near-two-week high.

Safe-haven German Bunds sold off as French election jitters ebbed. French banks such as BNP Paribas <BNPP.PA> and Societe Generale <SOGN.PA> - bellwethers of sentiment in France - were among the top gainers on France's benchmark stock index <.FCHI>.

The euro topped $1.08 <EUR=> to reach its highest level in about six weeks.

Candidates for the 2017 presidential election Francois Fillon (R), former French Prime Minister, member of the Republicans and candidate of the French centre-right and Emmanuel Macron, head of the political movement En Marche !, or Onwards !, shake hands before a debate organised by French private TV channel TF1 in Aubervilliers, outside Paris, France, March 20, 2017. REUTERS/Patrick Kovarik/Pool

"The euro has been helped by Macron's performance, definitely," said Stephen Gallo, head of European FX strategy at Bank of Montreal in London.

SOFTER DOLLAR

After four days of trading focused chiefly on expectations for U.S. interest rates and the Trump administration's attitude to trade and a stronger dollar, the euro's gains also sent the dollar index to a six-week low below 100 <.DXY>.

Sterling rose almost 1 percent to a three-week high of $1.2474 <GBP=D4> after stronger-than-expected inflation numbers that took the rate of prices past the Bank of England's 2 percent target.

With the data potentially adding to uneasiness among central bank officials about keeping rates near zero, British gilt yields rose sharply, contributing to a broader sell-off in bond markets.

Attention was also turning to a spate of U.S. Fed speakers lined up for Tuesday.

Bank of Kansas City President Esther George and Cleveland Fed chief Loretta Mester are scheduled to speak, while Boston Fed head Eric Rosengren will release the text of his speech.

On Monday, Chicago Federal Reserve President Charles Evans said that two more interest rate hikes this year were likely, disappointing investors who had anticipated rates would be increased more quickly.

Elsewhere, oil prices rallied on expectations that an OPEC-led production cut to prop up the market could be extended.

Prices for front-month Brent crude futures, the international benchmark for oil, gained 0.6 percent to $51.91 per barrel. But the rise was pegged back by concerns about persistently high crude inventories.

(Additional reporting by Abhinav Ramnarayan in London and Hideyuki Sano in Tokyo, editing by Ed Osmond)

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