Euro Plunges to 17-Month Low Amid French Fiscal Contagion Fears

The euro dropped to its lowest level in 17 months on Monday, falling to $1.1161 during Asian trading hours, as fears of contagion spread across Europe due to France's worsening fiscal situation. The decline came after four consecutive weeks of losses, driven by concerns over France's high debt levels and political uncertainty ahead of next year's elections. Analysts warned against expecting a quick rebound, with Chris Weston of Pepperstone cautioning traders not to 'stand in front of the train.'

French bond markets also faced significant pressure, with futures dipping 0.22%, nearing record lows. The spread between French and German 10-year borrowing costs hit its largest weekly increase in 17 years, rising 34 basis points. Meanwhile, the dollar strengthened, supported by rising Treasury yields and safe-haven demand amid global debt selloffs. The dollar index climbed 0.47% to 102.37, despite softer-than-expected US jobs data, which reduced expectations of near-term Federal Reserve rate hikes.

Some analysts, however, cautioned that it may be premature to predict widespread contagion. Ninghui Liu of State Street Investment Management suggested the market reaction was primarily focused on France rather than a broader eurozone crisis. He noted that Germany would likely intervene if the situation worsened to prevent further instability in the European Union.

The euro's decline also reflected broader market turmoil following a recent global bond rout, which pushed borrowing costs to multi-decade highs. Sterling and the Japanese yen also weakened against the dollar, while Brent Donnelly of Spectra Markets highlighted that political risks in France were already escalating ahead of the 2027 elections. The euro was last trading at $1.1176, down 0.68% on the day.