Euro Slumps to 17-Month Low on French Fiscal Fears

The euro fell sharply on Monday to its lowest level in 17 months, dropping to $1.1161 in Asian trading. This decline was driven by growing fiscal concerns in France, following a significant bond market sell-off that raised fears of contagion across the eurozone. The euro's weakness has been compounded by political uncertainty ahead of France's 2027 elections, with investors wary of budget promises from a government facing imminent change.

Analysts noted that the euro's decline reflects broader fiscal issues, with some warning against betting on a quick rebound. Brent Donnelly, president of foreign exchange trading at Spectra Markets, observed that the political trade expected for next winter is already unfolding. Meanwhile, Ninghui Liu of State Street Investment Management suggested that while France's fiscal instability is worrisome, it may not yet signal a full-blown eurozone crisis.

The bond market turmoil has also heightened borrowing costs globally, with French bond futures nearing record lows. In contrast, German Bund futures rose slightly, highlighting the divergence in bond markets as investors seek safer debt. The premium on French 10-year borrowing costs over Germany's surged to 140 basis points last week, its largest weekly jump in 17 years.

The dollar has benefited from these developments, with the dollar index rising 0.47% to 102.37. This strength comes despite softer-than-expected US jobs data, which has reduced expectations of a Federal Reserve rate hike in October. Traders now see a 78% chance of rates remaining steady this month, though they still anticipate hikes in December and early 2027.