The Ides of May Mean Dark Days in France

The 2.7 million U.S. tourists who visit France each year also are scaling back travel plans, a factor that could directly knock off as much as 0.4% from GDP but will more likely shave 0.1% to 0.2%. Indirect costs such as tourism job losses and reduced taxes also will burden the French economy.

The way things are shaping up, France could be a net drag on the collective growth of the 12 countries that use the euro. And as the second-largest economic force in Europe, French weakness may work to tip the scales for the European Central Bank to cut its benchmark rate from 2.50% when it meets June 5 or later this summer.

Three weeks away from the ECB monetary policy setting meeting, July Euribor futures traded on the Euronext.liffe are pricing in a 25-basis-point cut to 2.25%. That would leave short-term rates European rates just 1% above the comparable Fed funds rate.

Interest rates differentials have been a factor driving June euro FX futures to record highs and dollar index futures to a multiyear low. Add to the rate differential a grimmer economic outlook for France and euroland, and it takes the shine off buying the euro FX at these lofty levels and selling the dollar index at current depths.

Talking Politics

Political pressure from French and ECB officials also is showing up. French Finance Minister Francis Mer appeared to jawbone for ECB action Wednesday when he said the euro's rise against the dollar was "not very favorable in terms of growth" and that ECB monetary policy still had room to maneuver. ECB Council member Ernst Welteke also said earlier this week that the bank had room for "rate cuts."

The two-month old rally in stocks and unrequited momentum in debt futures I pointed out on May 2 and May 12 should also attract buyers of American securities and spur some dollar buying.

Finally, on the technical front, notice that June dollar index futures are finding support less than 50 cents above the measured move target of 94.00 projected three weeks ago.