Euro Slumps to 17-Month Low on French Debt Fears

The euro hit its lowest point against the dollar in 17 months as fears over French debt spread through European markets. On Monday, the currency dropped 0.8% to $1.116, a level not seen since May 2025, and also weakened against the pound, Swiss franc, and Japanese yen. The decline came amid political struggles in France over an unpopular 2027 budget aimed at reducing the deficit and debt burden. Investors sold French bonds, driving up yields and widening the spread between French and German debt to 158 basis points, the highest since 2011.

The pressure extended beyond France, with Italy and Spain also facing political uncertainty. German bonds saw yields drop sharply, while traders bet on further euro weakness. Analysts noted that the euro’s summer support had faded, with Kit Juckes of Societe Generale linking the currency’s slide directly to French debt sell-offs. Bank of America estimated that every 10 basis point increase in the French-German spread could push the euro down 0.4% against the dollar.

Inflation and political risks complicate the European Central Bank’s (ECB) efforts, as higher yields raise borrowing costs. While the ECB has tools like the Transmission Protection Instrument to stabilize markets, analysts like Joseph Capurso of Commonwealth Bank of Australia remain bearish on the euro, predicting it could fall below $1.10 without significant oil price drops or French deficit control. The currency’s decline, though steep, still sits above its 2022 low following Russia’s invasion of Ukraine.

By Tuesday, some pressure eased as French bond yields dipped and the euro recovered slightly to $1.1246. However, the broader trend remains uncertain, with investors closely watching France’s budget debate and political developments.