Euro Slumps to 17-Month Low on French Debt and US Inflation Fears
The euro hit a 17-month low against the dollar on Monday, driven by concerns over France's ability to manage its budget deficit and persistent US inflation pressures. French government bonds faced increased pressure as higher interest rate expectations and political uncertainty ahead of the 2027 election raised doubts about the stability of the euro zone’s second-largest economy.
The yield spread between French bonds and German Bunds widened to nearly 160 basis points on Friday, the highest since the 2011 euro-zone sovereign debt crisis, before narrowing slightly. Investors favored safer assets like German bonds amid growing fiscal and inflation worries. Erik Bregar, director of FX and precious metals risk management at Silver Gold Bull, noted that the market is rejecting France’s 2027 budget due to upcoming elections and fiscal austerity concerns.
The euro fell 0.37% to $1.1211 after reaching a 17-month low of $1.116, marking its fourth consecutive weekly decline against the dollar. Meanwhile, the dollar index rose 0.26% to 102.16, supported by persistent US inflation concerns despite reduced expectations of a Federal Reserve rate hike this month.
The Institute for Supply Management’s non-manufacturing purchasing managers’ index slipped to 54.9 in September, slightly below forecasts but still indicating expansion. The survey’s measure of prices paid by businesses increased, reinforcing inflation concerns. Markets now see an 86.8% probability of a December rate hike.
The dollar also strengthened against the yen, rising 0.09% to 157.97, despite verbal warnings from Japanese authorities about the yen’s depreciation. Japanese Prime Minister Sanae Takaichi pledged to control bond issuance and respond to market turbulence amid concerns over public finances and rising bond yields. Sterling slipped 0.14% to $1.3223 but gained against the euro.