Euro Plummets to Fresh Low Amid French Debt and Inflation Fears

The euro sank below 1.12 against the US dollar for the first time since May 2025, driven by a combination of dollar strength and euro weakness. A hawkish Federal Reserve initially triggered the decline from above 1.16 in mid-September, but euro-specific factors have since taken over. The French 10-year OAT swap spread surged to a new all-time high above 140 basis points, up from 80 bps at the end of August, signaling growing investor concerns over European debt sustainability.

Last week’s disappointing US payrolls report failed to weaken the dollar, while European markets grappled with political and economic risks. France’s draft budget proposal, which maintains a 5% deficit, has raised fears of prolonged fiscal strain, especially with presidential elections on the horizon. The spread of contagion to other European sovereign bonds, such as those of Belgium and Italy, has further unsettled investors, while Germany and the Netherlands benefited from safe-haven flows.

The European Central Bank’s tightening bets have been scaled back due to echoes of the EMU debt crisis over a decade ago. The EU 2-year swap rate dropped by 20 bps last week, reflecting fears of a credit crunch that could slow economic growth. This risk is compounded by accelerating inflation and high energy prices, with September’s EMU CPI rising to 0.6% month-over-month and 3.8% year-over-year, surpassing expectations. Services inflation also accelerated, pushing the year-over-year figure to 3.2%.

Technical support for EUR/USD is now seen at 1.1111/1.1087, with EUR/GBP approaching its year-to-date low at 0.8455. The Swiss franc has strengthened, with EUR/CHF falling below 0.93 for the first time since July. The ECB’s annual monetary policy conference begins today, with chief economist Lane delivering the keynote speech. Meanwhile, the US services ISM report is expected to highlight continued economic strength in the US.