Euro Plummets to 17-Month Low on French Fiscal Contagion Fears

The euro hit a 17-month low on Monday, falling to $1.1161 in Asian trading, as concerns over France’s fiscal stability and political uncertainty fueled contagion fears across the eurozone. The single currency dropped 0.68% against the dollar, while also weakening against the Swiss franc and sterling. Analysts warn against betting on a quick rebound, citing ongoing fiscal issues and the potential for broader regional instability.

The downward pressure on the euro stems from France’s rising debt levels and political gridlock ahead of the 2027 elections, which has led to a sharp sell-off in French bonds. Brent Donnelly, president of foreign exchange trading at Spectra Markets, noted that the political risks many expected to escalate later are already materializing, making budget promises from the current government less credible.

Market volatility has intensified due to a recent global bond rout, which has pushed borrowing costs to multi-decade highs. French bond futures fell 0.22%, while German Bund futures rose 0.1%, reflecting investor shifts toward safer debt. The premium of French 10-year borrowing costs over Germany’s surged to 140 basis points, its largest weekly jump in 17 years, according to LSEG data.

Meanwhile, the dollar strengthened as investors sought safe-haven assets, supported by rising Treasury yields and a sell-off in global debt. The dollar index climbed 0.47% to 102.37, despite softened expectations for a Fed rate hike in October following weaker-than-expected U.S. jobs data. Traders now anticipate a 78% chance of steady rates in October, though they still expect hikes in December and early 2027.