Euro sinks to 17-month lows as French bond fears spread
The euro has hit new lows against major currencies, fueled by growing concerns over rising French borrowing costs and political instability across Europe. The euro dropped below $1.12 on Monday, its lowest level in 17 months, and also weakened against the British pound, Swiss franc, and Japanese yen. The focus of these concerns is France, where the government is struggling to pass a 2027 budget aimed at reducing its deficit and managing record-high debt. Political divisions and upcoming elections are making investors wary, leading them to sell French bonds and buy safer German debt. This has widened the premium investors demand for holding French bonds over German ones to levels not seen since the 2010-2012 eurozone debt crisis.
The broader eurozone is also facing economic and political challenges. Germany's ruling party recently suffered a significant election defeat, Spain's prime minister has called a snap election, and Italy is preparing for elections next year. Inflation is rising due to higher energy costs, and increasing bond yields are raising borrowing costs for households and businesses. The European Central Bank is now caught between fighting inflation and stabilizing bond markets.
The gap between French and German 10-year bond yields saw its largest weekly jump in decades, while the gap between Italian and German yields reached nearly 130 basis points, the biggest increase since the COVID-19 crisis. Analysts note that the bond sell-off is driving investors to sell the euro, particularly as the currency's strength was previously supported by assumptions of a short-lived energy shock and a weaker U.S. dollar. The euro's decline is being amplified by these bond market moves, adding a new dimension to its weakness.
Analysts predict the euro could test $1.10, with further vulnerability against currencies like the yen and Swiss franc. A falling euro alongside bond market stress has raised questions about how policymakers might stabilize markets, especially if France's 2027 election causes more strain. The ECB's Transmission Protection Instrument allows it to buy unlimited bonds from a country experiencing unwarranted financing conditions, but for now, growth has slightly strengthened. However, the risk of fiscal contagion in Europe could push the euro even lower.