Euro Drops to 17-Month Low Amid Euro Zone Debt Fears
The euro reached a 17-month low against the dollar on Monday, driven by concerns over France's budget deficit and a recent bond market selloff. Investors are worried about a potential sovereign debt crisis in the euro zone, particularly as French government bonds face pressure due to expectations of higher policy rates and rising political uncertainty ahead of the 2027 election. The yield gap between French bonds and German bunds widened to nearly 160 basis points on Friday, the largest since the 2011 euro zone crisis, though it later narrowed slightly to 136 basis points. Erik Bregar, director of FX and precious metals risk management at Silver Gold Bull, noted that the market is rejecting France's 2027 budget, making fiscal austerity unlikely ahead of elections.
The euro fell 0.36% to $1.1211, after hitting a low of $1.116, its weakest level since May 2025. This marks the single currency's fourth consecutive weekly decline against the dollar, with a total drop of 3.1%. Political turmoil in the region was further fueled by Spanish Prime Minister Pedro Sanchez's call for a snap election on November 29, following parliamentary rejection of housing crisis proposals.
The dollar gained strength due to persistent inflation concerns in the US, despite reduced expectations for a Federal Reserve rate hike at the end of the month. The Institute for Supply Management's nonmanufacturing Purchasing Managers Index fell to 54.9 in September, slightly below estimates but still indicating expansion. The dollar index rose 0.28% to 102.19, reaching its highest level since April 2025. Against the yen, the dollar strengthened 0.12% to 158.04, as Japanese authorities' warnings failed to halt the yen's weakness.
Japanese Prime Minister Sanae Takaichi pledged to control bond issuance and address market turbulence, aiming to reassure investors concerned about Japan's public finances. A business survey revealed slower growth in Japan's service sector in September, affected by earthquake disruptions. Meanwhile, the British pound weakened 0.21% to $1.3213 but gained 0.2% against the euro.