Euro Hits 17-Month Low as French Fiscal Worries Spread
The euro has fallen to a 17-month low as concerns over France's fiscal position and political outlook weigh on the currency, with broader implications for the eurozone and global markets.
Chanan Zevin — Chief Editor and Head of Desks
Euro Slides Amid French Fiscal Concerns
The euro weakened sharply on Monday, reaching a 17-month low as fiscal worries in France and a steep bond market rout stoked fears of contagion risks across the eurozone. The currency fell to as low as $1.1161 in Asian trading, marking its weakest level since May 2025 after four consecutive weekly declines. This downturn has been closely linked to France's debt levels and the potential for political gridlock ahead of next year's election. [S1]
By the end of the session, the euro was down 0.67 percent at $1.1178, reflecting persistent market anxiety. The euro also weakened 0.4 percent against the Swiss franc and slid 0.34 percent against sterling, highlighting the broad-based nature of the selloff. The latest ECB reference rate places the euro at $1.1269, underscoring the recent volatility. [S1][S2]
Market participants are increasingly focused on France, with analysts noting that the political risks many expected to materialize closer to the April 2027 elections are now manifesting. Brent Donnelly, president of Spectra Markets, emphasized that any budget promises by the French government lack credibility given the looming possibility of a change in power. [S1]
French Debt and Political Uncertainty
France's fiscal challenges have become a focal point for investors, particularly as French bond futures dipped 0.13 percent, hovering near record lows seen in recent weeks. The rout in French debt has been exacerbated by global inflation concerns, especially as oil prices remain elevated. This environment has heightened the sensitivity of markets to perceived fiscal vulnerabilities within the eurozone. [S1]
Political uncertainty is compounding these fiscal concerns. With elections approaching, the prospect of gridlock or a shift in government has raised doubts about the credibility and effectiveness of any fiscal reforms. Investors are wary that promises made now may not be upheld, further undermining confidence in French assets and, by extension, the euro. [S1]
The broader context of rising global borrowing costs has intensified scrutiny of countries with high debt levels. The yield on US 10-year Treasury notes, for example, stood at 5.262 percent after spiking to a 24-year high last week, rattling global markets and contributing to the selloff in French and other European bonds. [S1]
Safe-Haven Flows and Dollar Strength
As concerns over French fiscal stability mount, investors have sought refuge in traditional safe-haven assets. The US dollar has been a primary beneficiary, with the dollar index—measuring the greenback against six major currencies—rising 0.47 percent to 102.37. This reflects both the appeal of US assets and the broader selloff in global debt markets. [S1]
Matthew Ryan, head of market strategy at Ebury, noted that the rise in Treasury yields is boosting the attractiveness of US assets, while the global debt selloff is fueling safe-haven flows into the dollar. The Swiss franc has also benefited, as the euro weakened 0.4 percent against it, underscoring the shift in investor sentiment. [S1]
OCBC strategists observed that if rate volatility remains elevated, pressure on carry trades, cyclical currencies, and the euro is likely to persist. In contrast, traditional havens such as the Swiss franc and the dollar are expected to remain supported, further weighing on the euro's prospects in the near term. [S1]
Central Bank Policy and Market Expectations
The European Central Bank's reference rate for the euro stands at $1.1269, reflecting the currency's recent depreciation. While much of the dollar's strength has been attributed to expectations of further US Federal Reserve rate hikes, recent US jobs data has tempered those expectations, suggesting a more cautious outlook for monetary policy. [S2][S1]
Mansoor Mohi-uddin, chief macro strategist at Bank of Singapore, highlighted that US labor market data showed no signs of overheating, despite inflation remaining above the Fed's 2 percent target since the pandemic. As a result, traders are now pricing in a 78 percent chance of the Fed holding rates steady in October, up from 36 percent a week earlier. [S1]
Despite these developments, some analysts believe market pricing for future rate hikes is overly aggressive. Jefferies strategist Mohit Kumar suggested that the firm's base case is for one hike each from the Fed and the ECB, but cautioned that central banks may not deliver the rate increases currently anticipated by markets, especially if oil prices remain elevated or growth slows. [S1]
Outlook for the Euro and Eurozone Stability
The euro's decline to multi-month lows reflects deepening investor unease about the eurozone's fiscal and political outlook, with France at the center of these concerns. The sources do not specify the ECB's policy response to the recent market turmoil, leaving uncertainty about how the central bank might act if pressures intensify. [S1][S2]
Market participants will be closely monitoring developments in France, as well as broader eurozone fiscal dynamics, for signs of stabilization or further deterioration. The interplay between political uncertainty, fiscal policy, and central bank actions will be critical in shaping the euro's trajectory in the coming months. [S1]
In summary, the euro faces significant headwinds from both domestic and international factors. While the immediate trigger has been French fiscal worries, the broader context of global rate volatility and safe-haven flows suggests that the currency may remain under pressure until greater clarity emerges on both the political and economic fronts. [S1]