Euro falls as 'gilets jaunes' protests hit French economy

'Yellow vest' protests have dented the French economy

The euro has fallen against the dollar after disappointing French and German economic surveys dismayed the markets.

In France, private sector business activity contracted for the first time in two and a half years as the "gilets jaunes" protests took their toll.

In Germany, private sector activity slowed to a four-year low. The surveys pointed to weak fourth-quarter growth in the two biggest eurozone economies.

After the figures were published, the euro fell 0.6% to below the $1.13 mark.

The data came from closely-watched surveys published by research group IHS Markit, which tracks business activity across Europe in its Purchasing Managers' Index (PMI).

Its December composite figure for the French economy was down sharply at 49.3, from November's reading of 54.2.

Any figure below 50 indicates contraction rather than expansion. The French reading confounded analysts, with the index hitting depths not seen since November 2014.

"Having held up reasonably well throughout the initial months of Q4, latest flash data pointed to an outright contraction in France's private sector for the first time in two-and-a-half years, following the protests which have swept through the country in recent weeks," said Eliot Kerr, an economist at IHS Markit.

"Momentum in the manufacturing sector's downturn gathered pace, while most notably, the service sector's resilience came to a halt, with business activity and demand dropping."

For the German economy, the equivalent figure was 52.2, as against 52.3 the previous month.

• Who are the 'gilets jaunes'?

• Macron promises divide protest leaders

The impact of the "yellow vest" demonstrations has been keenly felt in France, where the government has been forced to bow to pressure and change its economic course.

President Emmanuel Macron has responded to the nationwide street protests by scrapping an unpopular fuel tax rise and promising an extra €100 (£90; $114) a month for minimum wage earners and tax cuts for pensioners.

However, it is far from clear that he has done enough to defuse public anger.

Bart Hordijk, market analyst at Monex Europe, said: "The sentiments among the yellow vests may have quite some support from the French public. However, businesses beg to disagree.

"If the magnitude of this drop continues in other countries and coming months, the European Central Bank's assessment that the eurozone economy 'risks moving to the downside' will quickly seem outdated, as the risks will already be there.

"The ECB president talked yesterday of 'lower growth, not of no growth'. However, a tail risk is forming that eurozone economies will slip into a recession while the ECB interest rates are still sub-zero.

"This would be a Japan-like scenario: a prospect which the euro understandably does not take well."