Euro Plunges to 17-Month Low Amid Political and Fiscal Uncertainty
The euro dropped to its lowest level since May 2025, hitting 1.1161 per dollar during Asian trading. The decline was fueled by hedge fund selling and fast-money accounts in Asia dumping euros for dollars. This selling pressure triggered options-linked flows, exacerbating the euro's slide. The euro also fell for the third consecutive day against the Swiss franc, losing about 0.5%.
The political instability in France and Spain contributed to the euro's weakness. Concerns over an early election in Spain and the rising instability of the French government have shaken investor confidence. The extra yield required to hold French debt over German bunds reached levels last seen in 2011, signaling growing fiscal anxiety. Homin Lee of Lombard Odier Singapore Ltd. noted that bond and currency markets are reflecting investor discomfort with France's political and fiscal situation ahead of the 2027 elections.
The euro's decline was also supported by a stronger dollar. Expectations of three more Federal Reserve rate hikes by July bolstered the dollar, lifting the Bloomberg Dollar Spot Index to its highest since late June. Fiona Lim, senior FX strategist at Malayan Banking Berhad, highlighted that the widening of French credit default swap spreads has drawn attention to the fiscal health of other indebted Eurozone economies, further strengthening the dollar.
JPMorgan strategists, including Meera Chandan, argued that the euro has not yet fully priced in the moves in French bonds and remains vulnerable to further downside, particularly against the Swiss franc and the yen. They suggested that the euro-Swiss franc exchange rate is overvalued and could continue to decline. The weakening euro could impact consumer prices and corporate earnings, adding to the volatility in the market.