Euro Dips to 17-Month Low Amid French Debt Crisis Fears

The euro fell to its lowest level in 17 months against the dollar on Monday, driven by concerns over France's budget deficit and a sharp sell-off in bond markets. French government bonds faced pressure as rising policy rate expectations and political uncertainty ahead of the 2027 election raised doubts about the sustainability of the euro zone's second-largest economy's public finances. The yield gap between French bonds and safe-haven Bunds widened to about 150 basis points on Friday, the highest since the 2011 sovereign debt crisis, before narrowing to 140 bps. It later rose to 145.50 basis points.

Hauke Siemssen, a strategist at Commerzbank, noted that the bond market dynamics were increasingly concerning, resembling a sovereign debt crisis. The euro dropped to as low as $1.1161 in Asian trading, its weakest since May 2025, and was last down 0.62% at $1.1118. The single currency also recorded its fourth straight weekly decline against the dollar, the steepest in around four months.

Analysts argued that France's fiscal issues were exacerbated by an upcoming presidential election and a hung parliament, making it harder to address. Planned budget cuts have fueled discontent and sparked protests across the country. The euro's appeal as an alternative to the dollar has weakened further after the Federal Reserve's September rate hike, and last week's widening in French bond spreads dealt another blow.

The US dollar index rose 0.39% to 102.33, reaching its highest level since April 10, 2025. Traders are now pricing in a 78% chance of the Fed holding rates steady in October, up from 36% a week earlier. They still expect a rate hike in December and two more in the first half of 2027. The Japanese yen was up 0.10% at 157.67, supported by recent verbal warnings from the government against yen depreciation and its safe-haven status.