Euro hits 17-month low as French debt fears escalate

The euro reached a 17-month low against the US dollar in early trading on Monday, dropping to $1.12. This decline has been driven by mounting concerns over eurozone debt, particularly in France, along with rising global bond yields and oil prices. The euro has lost around 5% of its value since the start of 2026, reflecting a broader repricing of investor expectations regarding US Federal Reserve policy and higher interest rates.

The latest sell-off was sparked by worries about France's fiscal stability. French 10-year government bond yields surged to 5% last week before easing slightly. France's national debt has grown by over €1 trillion since President Emmanuel Macron took office in 2017, with public spending increasing and tax cuts deepening the deficit. The country's debt-to-GDP ratio now stands at nearly 118%, and its annual budget deficit regularly exceeds 5%.

The widening gap between French and German government bond yields has raised alarms, reaching levels not seen since the eurozone debt crisis. Investors are shifting to safer assets like German debt, intensifying pressure on the euro. Analysts debate whether this signals a new sovereign crisis or an overreaction by markets.

The European Central Bank (ECB) faces a delicate challenge in responding to the situation. Ricardo Amaro of Oxford Economics suggests that the ECB must act carefully to avoid exacerbating France's bond yields, which are a key driver of euro weakness. Meanwhile, political instability in France and Spain, fueled by economic struggles, adds to the uncertainty. A weaker euro could worsen inflation by increasing the cost of imported goods, particularly those priced in US dollars.