The euro has fallen to a 17-month low against the dollar, driven by concerns over France's ability to manage its budget deficit and a sharp selloff in bond markets last week. This has raised fears of a return to sovereign debt crisis dynamics in the eurozone. The euro sank to as low as $1.1161 in Asian hours, its weakest since May 2025, and was last down 0.47% at $1.12.
French government bonds have come under pressure due to expectations of higher policy rates and rising political uncertainty ahead of the 2027 election. This has cast doubt on the ability of the eurozone's second-largest economy to put its public finances on a more sustainable footing. The yield gap between French bonds and safe-haven bunds widened to about 150 basis points on Friday, the highest since the eurozone's sovereign debt crisis in 2011.
Analysts have expressed concerns that France's fiscal problems are daunting enough on their own, but an upcoming presidential election and a hung parliament make them even harder to address. Planned budget cuts have deepened an acute funding crunch in the education sector, fueling discontent and sparking protests across the country. Hauke Siemssen, a strategist at Commerzbank, described the latest bond market dynamics as "increasingly concerning and somewhat reminiscent of a sovereign debt crisis."
The euro's decline against the dollar has been significant, with the single currency recording its fourth straight weekly fall against the dollar, its steepest in about four months. The euro also dropped 1.8% against the Swiss franc since last Thursday and was last down 0.32% to 0.9295. Francesco Pesole, a forex strategist at ING, noted that the euro/Swiss franc is historically the cleanest way to hedge the eurozone fiscal risk, and further downside is possible.
The euro's appeal as a market alternative to the greenback was already fading after the Federal Reserve's September rate hike. Last week's sharp widening in French bond spreads dealt a further blow, analysts said. Traders are now pricing in an 80% chance of the US central bank holding rates steady in October, compared with 36% a week earlier.
The US dollar index, which measures its value against a basket of six major currencies, rose 0.30% to 102.23, after reaching 102.53, its highest level since April 10, 2025. In contrast, the Japanese currency was roughly unchanged, supported by recent verbal warnings from the government and authorities against yen depreciation and its safe-haven status.
Meanwhile, concerns about Japan's fiscal outlook eased after Prime Minister Sanae Takaichi reiterated her commitment to fiscal sustainability. Data showed that annual core inflation in Japan's capital accelerated in September at its fastest pace in 10 months, bolstering the case for further interest rate hikes.
Key points
- Eurozone fiscal concerns drive euro to 17-month low against dollar.
- French bond market selloff raises fears of return to sovereign debt crisis dynamics.
- Upcoming presidential election and hung parliament complicate France's fiscal problems.
