Euro Drops to 17-Month Low Amid France Fiscal Worries

The euro plunged to its lowest point in 17 months, driven by rising concerns over France's worsening public finances and Spain's announcement of a snap election. The currency dropped to $1.1161 in Asian trading on the 5th, its weakest level since May 2025, before partially recovering to around $1.12 by the European open. Analysts attribute the decline to growing fiscal risks in major eurozone economies, particularly France.

France's fiscal instability is the primary catalyst for the euro's weakness. The country faces a slowing economy, a wide budget deficit, and a heavy sovereign bond issuance burden. Political resistance to austerity measures has raised doubts about the feasibility of the government's fiscal consolidation plan. Japanese investors, the largest foreign holders of French government bonds, have been selling their holdings, further exacerbating the situation.

The yield gap between French and German 10-year government bonds widened to 152 basis points, the highest since the eurozone debt crisis in 2011. France plans to issue a record 340 billion euros in medium- and long-term government bonds next year, raising concerns about rising borrowing costs. Analysts warn that the 10-year yield could climb to 7% if market concerns about the sustainability of France's debt worsen.

Spain's political uncertainty is also contributing to the euro's decline. Reports of a snap election next month have prompted investors to monitor the potential spread of fiscal and political strains from France to other major economies. Analysts caution that prolonged fiscal problems in France could undermine confidence in the entire eurozone. The euro remains vulnerable to further selling against the Swiss franc and the yen, according to Meera Chandan, a strategist at JPMorgan.