Euro Drops to 17-Month Low Amid Eurozone Debt Fears

The euro plunged to a 17-month low against the dollar on Monday, reaching $1.1161 in Asian trading. The decline was driven by growing concerns over France's ability to control its budget deficit and a sharp sell-off in bond markets last week. Investors fear a resurgence of sovereign debt crisis dynamics in the eurozone, with French government bonds under pressure due to higher policy rate expectations and rising political uncertainty ahead of the 2027 election.

The yield gap between French bonds and German Bunds widened to about 150 basis points on Friday, the highest since 2011, before easing slightly. Commerzbank strategist Hauke Siemssen described the bond market dynamics as "increasingly concerning" and "somewhat reminiscent of a sovereign debt crisis." He noted that the sell-off in French bonds was feeding on itself, creating a dangerous market backdrop.

The euro's weakness was further compounded by the Federal Reserve's September rate hike, which reduced its appeal as an alternative to the dollar. Traders now see a 78 percent chance of the Fed holding rates steady in October, up from 36 percent a week earlier, but still expect hikes in December and early 2027. The dollar index rose to 102.33, its highest level since April 10, 2025, nearing the peak seen after President Donald Trump's "Liberation Day" tariff announcement.

Meanwhile, the Japanese yen gained support from tighter policy expectations and safe-haven demand. Prime Minister Sanae Takaichi's commitment to fiscal sustainability eased concerns about Japan's fiscal outlook. Data showing accelerated core inflation in Tokyo bolstered the case for further interest rate hikes in Japan.