Euro Hits 17-Month Low Amid French Fiscal and Political Turmoil

The euro weakened broadly against major currencies on Monday, sliding to a 17-month low as investor concerns over France's fiscal and political instability intensified. The EUR/USD pair dropped 0.85% to $1.1161, its lowest level since May 2025, extending losses after a brief rebound on Friday following strong European inflation data. The euro's decline marks its fourth consecutive weekly drop, with a 1.25% loss against the dollar last week, driven by widening interest rate differentials between Europe and the United States.

The US dollar strengthened, with the US Dollar Index climbing 0.6% to an 18-month high of 102.54, supported by rising US Treasury yields and safe-haven demand amid political risks in Europe and the Middle East. Despite softer-than-expected US employment data, markets still anticipate a high likelihood of further interest rate hikes in December.

France's fiscal pressures are mounting, with government debt rising and borrowing costs increasing. The French government plans to cut €54 billion from its 2027 budget and issue €340 billion in medium- and long-term bonds next year. The 10-year French government bond yield hit its highest level in over two decades, reflecting investor concerns over the country's ability to manage its debt amid political instability ahead of the April 2027 presidential election.

The spread between French and German 10-year bond yields widened to over 150 basis points, the highest since the eurozone debt crisis. This gap signals growing investor demand for a higher risk premium to hold French bonds compared to German bonds. Brent Donnelly, head of FX trading at Spectra Markets, noted that the emerging financial market turmoil suggests a French political crisis is beginning to take shape, with the current fiscal commitments lacking credibility.