Euro Falls to 17-Month Low on French Fiscal Fears

The euro hit a 17-month low on Monday as fiscal concerns in France escalated, dragging down the currency amid a broader bond market selloff. The single currency dropped to $1.1161 in Asian trading, its weakest level since May 2025, extending four straight weekly declines. France's rising debt levels and political uncertainty ahead of next year's election fueled fears of contagion risks across the region.

Brent Donnelly, president of foreign exchange trading at Spectra Markets, noted that the political turmoil in France is already impacting markets. "The French politics trade that many expected would escalate this winter as April 2027 elections neared … is here now," he said. Investors remain skeptical of any budget promises from the French government given the impending change in power.

The bond market rout last week also contributed to the euro's decline, with global borrowing costs reaching multi-decade highs. French bond futures dipped 0.13%, nearing record lows, while the yield on US 10-year Treasury notes settled at 5.262% after spiking to a 24-year high last week. The dollar benefited from safe-haven flows, with the dollar index up 0.47% at 102.37.

Meanwhile, expectations for US Federal Reserve rate hikes have softened after softer-than-expected jobs data. Traders now see a 78% chance of the Fed holding rates steady in October, though they still anticipate hikes in December and early 2027. Analysts, however, believe the market is pricing in too many rate increases, with Jefferies strategist Mohit Kumar forecasting just one hike from the Fed and the European Central Bank by March.