Euro Plummets to 17-Month Low Amid French Budget Turmoil

The euro fell to a 17-month low on Monday, October 5, dropping below $1.12 against the U.S. dollar. The decline came as political turmoil in France intensified, driving investors to sell French debt and seek safer assets like German bonds. The French government is struggling to pass an unpopular 2027 budget aimed at reducing the deficit and curbing public debt, which has hit a record high. Political divisions in France, along with upcoming elections, are fueling market uncertainty.

The gap between French and German 10-year bond yields widened significantly, reaching levels not seen since the eurozone debt crisis of 2010-2012. The spread between Italian and German bonds also surged, marking its largest weekly increase since the COVID-19 pandemic. Rising energy prices and political instability across Europe are adding to concerns, with Germany and Spain facing their own political challenges.

Analysts note that the euro’s decline is being driven by broader sell-offs in vulnerable assets. Kit Juckes, chief currency strategist at Societe Generale, linked the euro’s weakness to a broader market retreat. Traders are betting on further declines, with the euro’s three-month risk reversal hitting its lowest level since 2024. Some analysts predict the euro could test the $1.10 level, while others warn of further weakness against the yen and Swiss franc.

The European Central Bank (ECB) has tools to intervene, such as its Transmission Protection Instrument, which allows it to buy bonds if financing conditions deteriorate. However, the market remains focused on the potential for France’s budget problems to spread to other eurozone countries, which could intensify pressure on the euro. Despite slower growth, eurozone economic activity has shown signs of improvement, but political and inflationary risks continue to weigh on the currency.