Euro Plunges as French Debt and Spanish Election Jitters Intensify

The euro sank to its lowest level in 17 months against the US dollar at the start of the week, driven by rising fiscal and political concerns in France and Spain. The currency dropped to $1.1161 during Asian trading, though it later recovered slightly to around $1.12 at the European open. Analysts at ING warned that the euro could face an additional 2% risk premium if the bond sell-off continues.

The spread between French and German 10-year bond yields widened to roughly 146 basis points, marking the largest weekly increase in 17 years. France's 10-year yield climbed to 4.917% on Monday, nearing last week's 24-year high. French Finance Minister Roland Lescure defended the country's borrowing capacity, presenting a 2027 budget aimed at reducing the deficit from 5.4% to 5% of GDP ahead of next year's presidential election.

Spain added to the uncertainty when Prime Minister Pedro Sánchez announced a snap general election for 29 November, following the rejection of two housing decrees by parliament. Spain's 10-year yield remained steady between 4.07% and 4.09%, with its premium over German debt at around 65 basis points. European stocks opened mixed, with the Euro Stoxx 50 down 0.4% and the Stoxx 600 up 0.6%. France's CAC 40 fell over 1%, while Spain's IBEX 35 initially dropped but later recovered to a 0.4% gain.

The recent sell-off extended to Italian, Belgian, and Greek bonds, while German debt saw safe-haven demand. Analysts at KBC noted clear contagion effects spreading to other eurozone countries. The European Central Bank faces a difficult decision, having raised rates twice since June to combat inflation, which stood at 3.8% in September. ECB President Christine Lagarde downplayed comparisons to past crises, stating that 'it's not 2008 or 2011', though she acknowledged France's high debt levels as a serious concern.