Euro plunges to 17-month low amid euro zone debt crisis fears
The euro hit a 17-month low against the dollar on Monday, falling to $1.116 at one point, as concerns about France's budget deficit and a bond market selloff fueled fears of a euro zone debt crisis. French government bonds faced pressure due to expectations of higher policy rates and rising political uncertainty ahead of the 2027 election, raising doubts about the stability of the euro area's second-largest economy. The yield gap between French bonds and German bunds widened to nearly 160 basis points on Friday, the largest since 2011, though it narrowed slightly to 136 basis points by Monday.
Erik Bregar, director of FX and precious metals risk management at Silver Gold Bull in Toronto, noted that the market is rejecting France's 2027 budget, with elections making fiscal austerity unlikely. The euro was down 0.36% at $1.1211 after four straight weekly declines against the dollar, its longest losing streak since May 2025. Political turmoil in the region deepened as Spanish Prime Minister Pedro Sanchez called a snap election for November 29 after lawmakers rejected proposals to address a housing crisis.
The dollar gained strength due to persistent US inflation concerns, despite reduced expectations for a Federal Reserve rate hike this month. The Institute for Supply Management's nonmanufacturing Purchasing Managers Index fell to 54.9 in September, slightly below estimates but still indicating expansion. The dollar index rose 0.28% to 102.19, reaching its highest level since April 10, 2025, shortly after President Donald Trump unveiled a tariff package called 'Liberation Day.'
Against the yen, the dollar strengthened 0.12% to 158.04, despite verbal warnings from Japanese authorities against yen depreciation. Japanese Prime Minister Sanae Takaichi pledged to control bond issuance and act against market turbulence, seeking to reassure investors worried about Japan's public finances. A business survey showed Japan's service sector expanded at a weaker pace in September due to earthquake disruption. Sterling weakened 0.21% to $1.3213 but gained 0.2% versus the euro.