Euro Drops to 17-Month Low Amid French Debt Fears and US Inflation Concerns

The euro fell to its lowest level in 17 months against the dollar, driven by growing concerns over France’s budget deficit and the potential for a euro-zone debt crisis. Political uncertainty ahead of France’s 2027 election has intensified worries about the country’s ability to stabilize its public finances, leading to increased selling pressure on French government bonds. Investors have favored safer assets like German government debt, causing the yield spread between French bonds and German Bunds to widen to nearly 160 basis points at one point, its highest since the 2011 euro-zone sovereign debt crisis.

The euro’s decline was further exacerbated by persistent inflation signals in the US, which bolstered the dollar’s strength. The dollar index reached its highest level since April 2025, while the euro dropped 0.37% to $1.1211 after hitting a low of $1.116, its weakest point since May 2025. This marks the euro’s fourth consecutive weekly decline against the dollar, its longest losing streak since May 2025.

Despite a sharp drop in expectations of a Federal Reserve rate hike this month, inflation concerns in the US have continued to support the dollar. The Institute for Supply Management’s non-manufacturing PMI for September slightly missed forecasts but remained above the expansion threshold, with a measure of input prices paid by businesses increasing, signaling lingering inflation. Markets now see an 86.8% probability of a rate hike in December.

Elsewhere, the dollar strengthened 0.09% against the yen, despite verbal warnings from Japanese authorities about the yen’s depreciation. Japanese Prime Minister Sanae Takaichi pledged to control bond issuance and respond swiftly to market turbulence amid concerns over the country’s deteriorating public finances. Meanwhile, the British pound slipped 0.14% to $1.3223 but gained about 0.2% against the euro.