Euro Plummets to 17-Month Low Amid French Fiscal Crisis Fears

The euro dropped to a 17-month low against the dollar on Monday, as worries about France's budget deficit and a bond market selloff reignited fears of a sovereign debt crisis in the eurozone. French government bonds faced pressure due to rising policy rate expectations and political uncertainty ahead of the 2027 election, raising doubts about the sustainability of France's public finances. The yield gap between French bonds and safe-haven Bunds widened to 150 basis points on Friday, the highest since the 2011 eurozone crisis, before easing slightly.

"Latest bond market dynamics are increasingly concerning and somewhat reminiscent of a sovereign debt crisis," said Hauke Siemssen, strategist at Commerzbank. The euro fell to $1.1161, its weakest since May 2025, and was last down 0.47% at $1.12. The single currency also declined 1.8% against the Swiss franc since last Thursday, with analysts suggesting further downside. "Euro/Swiss franc is historically the cleanest way to hedge the eurozone fiscal risk," noted Francesco Pesole, forex strategist at ING.

The euro's weakness as an alternative to the dollar intensified after the Federal Reserve's September rate hike. Traders now see an 80% chance of the Fed holding rates steady in October, up from 36% a week earlier. The US dollar index rose 0.30% to 102.23, nearing its highest level since April 2025. Meanwhile, the Japanese yen remained steady at 157.92, supported by government warnings against yen depreciation and its safe-haven status.

Prime Minister Sanae Takaichi's commitment to fiscal sustainability eased concerns about Japan's fiscal outlook. Data showed that annual core inflation in Tokyo accelerated in September at its fastest pace in 10 months, strengthening the case for further interest rate hikes in Japan.