Euro Rebounds From 17-Month Low Amid Debt Market Relief

The euro rebounded on Tuesday, rising 0.35% against the US dollar to $1.126, marking its strongest daily gain in seven weeks. The currency had hit a 17-month low of $1.116 on Monday amid growing concerns over euro zone debt markets and political instability in France and Spain. A pullback in French government bond yields helped ease some of those fears, providing temporary relief to the euro.

The dollar index fell 0.32% to 101.83, its biggest daily drop since early September. Bond markets globally have faced pressure from rising yields due to expectations of aggressive central bank rate hikes, driven by higher energy prices stemming from the Iran war and inflation concerns. French debt has been particularly strained as politicians struggle to rein in the budget deficit ahead of a contentious 2027 election, while a snap election in Spain added further uncertainty.

An early drop in energy prices helped French bonds rally, with the 10-year yield falling 11.4 basis points to 4.7506%. Oil prices had initially declined after Saudi-backed Yemeni forces recaptured strategic territory from the Houthis, easing supply concerns. Marc Chandler, chief market strategist at Bannockburn Capital Markets, noted that this development helped drag yields down, including in France and Italy, where spreads had recently widened.

The yen was the exception, with the dollar rising 0.11% to 158.08 against the Japanese currency. The Bank of Japan may signal this month that underlying inflation has hit its 2% target, suggesting readiness to raise interest rates further. Meanwhile, the US dollar's strength has persisted despite weakening expectations for a Federal Reserve rate hike in October, though markets still anticipate hikes later this year and next.