Euro Slumps to 17-Month Low Amid Eurozone Political Turmoil

The euro fell to its lowest level against the U.S. dollar in 17 months on Monday, driven by growing political uncertainty in Spain and France. The currency dropped 0.6%, reaching a low not seen since May 19, 2025, according to LSEG data. This decline comes as the eurozone faces a challenging economic environment marked by rising inflation, interest rates, and government borrowing costs.

Rufaro Chiriseri, head of fixed income for RBC Wealth Management, highlighted Spain's relative stability in the region. He noted that Spanish assets have been a preferred investment this year due to the country's growth trajectory and fiscal discipline. 'It's the strength of the commitment to holding some of those fiscal rules that's quite crucial,' Chiriseri said. Even during last week's bond market sell-off, Spanish and Portuguese debt did not decline as sharply as French or Italian debt.

France, meanwhile, remains a focal point for Europe's sovereign debt issues. Economists at Barclays suggested that France's draft 2027 budget, aimed at reducing the public deficit from 5.4% to 5% of GDP, is unlikely to meet fiscal targets even if approved. 'French fiscal and political developments cloud the euro area outlook,' they said, emphasizing that the country's fiscal fundamentals remain weak.

Strategists at ING echoed this sentiment, stating that the budget, if passed, would not resolve France's structural fiscal problems. They warned that the deficit would remain too high to stabilize the debt ratio, with rising ageing-related expenditure and interest payments. The next government will face difficult choices, as none of the main presidential candidates have presented a detailed plan to address these issues.