Euro hits 17-month low as France debt worries intensify

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Euro hits 17-month low

Highlights

The euro fell to a 17-month low of $1.1161.
French bond stress is weighing on the currency.
Political uncertainty is spreading beyond France.

The euro fell as much as 0.8% to $1.1161 during Asian trading before recovering slightly to around $1.1176. Bloomberg reported that hedge funds were among the sellers in Asia and that the drop through key price levels prompted additional options-related transactions. The euro has now declined for four consecutive weeks.

French debt pressure reaches foreign exchange markets

France has become the main source of concern for European assets after a sharp repricing of its government debt. The yield premium investors demand on French 10-year bonds over comparable German debt finished last week at 140 basis points, widening by 34 basis points in five sessions. It was the largest weekly increase in 17 years.

That divergence has given currency traders another reason to reduce exposure to the euro. French bonds have been hit by questions over the country’s ability to bring its budget deficit under control while political divisions make agreement on spending measures difficult.

The pressure is also visible outside the euro-dollar pair. The currency lost about 0.5% against the Swiss franc and 0.39% against sterling on Monday. Reports that Spanish officials were preparing for the possibility of an early election added to concerns about political stability within the region.

Dollar gains despite weaker U.S. hiring

Conditions in the U.S. have reinforced the move. The dollar index advanced 0.47% to 102.37, even though September employment figures reduced expectations that the Federal Reserve would raise interest rates at its October meeting.

Traders now see a 78% chance that rates will remain unchanged this month, up from 36% a week earlier. Expectations for a December increase and further tightening during the first half of 2027 have not disappeared, leaving U.S. interest rates high relative to many other developed markets.

The 10-year Treasury yield eased to about 5.26% after reaching a 24-year high last week. German bonds, meanwhile, attracted demand as French debt remained under pressure, widening the divide between the euro area's largest sovereign bond markets.

France becomes a test for the wider euro area

The immediate problem is concentrated in France rather than across the entire currency bloc. Still, the euro's decline shows that investors are no longer treating the French bond selloff solely as a domestic fixed-income issue.

Currency markets are now responding to questions about fiscal discipline and political stability across the region. If pressure on government debt persists, the consequences could extend beyond sovereign borrowing costs, affecting the relative appeal of European assets and demand for the euro itself.

The distinction matters because the euro links economies with very different debt burdens and fiscal positions. A prolonged divergence between their borrowing costs would leave investors paying closer attention to whether stress remains confined to individual governments or begins influencing confidence in the currency area more broadly.

We also reported the ECB warns the energy crisis remains the main threat to the euro area economy.

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