Euro faces energy and political risks near two-month low

The euro is trading near two-month lows below $1.14 against the dollar, pressured by a global energy shock and rising political risks in Europe, despite the economy performing better than expected. The currency has fallen about 2% this month after approaching $1.20 in August. A stronger dollar, boosted by Federal Reserve rate hikes, combines with European concerns including Germany's far-right electoral gains threatening Chancellor Friedrich Merz's reform agenda, French debt worries, and surging gas prices above €80 per megawatt hour due to the Iran war choking LNG shipments through the Strait of Hormuz. French bond yield premiums over German debt have widened past 110 basis points. Analysts warn further energy price increases could push the euro toward $1.12, though some maintain year-end forecasts near $1.16. Options traders have turned more negative on the currency, with risk reversals posting their biggest weekly fall since the Iran war began.