European stocks decline, US dollar hits near 38-year high against Yen

European stocks: European stocks dipped on Tuesday, reversing the previous day's relief rally, while the US dollar reached a near 38-year high against the Japanese yen due to the possibility of a second Donald Trump presidency, which kept Treasury yields elevated.

Europe's broad Stoxx 600 index fell 0.5 per cent, and France's CAC40 dropped 0.65 per cent, unable to hold onto Monday’s gains. Most other European national indexes, including those in Britain, Germany, Italy, and Spain, were also in the red.

The French blue-chip benchmark rose 1 per cent on Monday following the first round of the country's parliamentary election, which suggested a likely legislative gridlock rather than a majority for the far right or left. The premium for holding French debt over German debt narrowed to 75 basis points, though investors remain cautious ahead of the final round of voting this Sunday.

Tuesday's focus is on whether opponents of France's far right can form a united front to impede its victory.

In the US, elections are a key concern for investors, with elevated Treasury yields supporting the dollar. Derek Halpenny, head of research, global markets EMEA at MUFG, noted, "It certainly looks to us to be investors increasingly trading on the prospect of a Trump victory. More fiscal stimulus and trade tariffs are inflationary and could be putting upside pressure on longer-term yields."

The benchmark 10-year Treasury yield was last at 4.45 per cent, down 3 basis points on the day, but close to the previous day's one-month high of 4.49 per cent, having risen around 20 basis points in less than a week. Germany's 10-year yield was last at 2.59 per cent, near a two-week high, moving in tandem with US yields.

US S&P 500 and Nasdaq futures were around 0.4 per cent lower.

Yen watching

Higher US yields bolstered the dollar, which was at $1.0719 to the euro. The dollar surged to 161.745 yen on Tuesday, a level not seen since December 1986, prompting traders to remain alert for Japanese intervention. Japan's Finance Minister Shunichi Suzuki reiterated that officials were monitoring currency markets but did not repeat a warning about readiness to act.

"Market participants continued to ignore his comments and appear to be testing the Ministry of Finance's resolve to support the JPY," said Carol Kong, a strategist at Commonwealth Bank of Australia.

Japan's Nikkei share index, often benefiting from a weaker currency, rallied over 1 per cent, outperforming other major markets in the region. China's yuan dropped to a fresh seven-month low, influenced by a shift in the central bank's daily guidance, suggesting authorities are willing to let the currency ease further.

Later in the day, monetary policy will be in focus as Federal Reserve Chair Jerome Powell and other top policymakers speak at an event in Sintra, Portugal, hosted by the European Central Bank. Crucial US employment data releases start with the JOLTS job openings report, followed by ADP numbers and the monthly payroll figures.

In energy markets, Brent futures added 0.36 per cent to $86.93 per barrel, building on a 1.9 per cent overnight rally. Gold remained flat at $2331.4 an ounce.

(With Reuters inputs)