The euro dropped to a 17-month low against the dollar on Monday, sliding below $1.12 as investors worried about France's stretched public finances and widening sovereign bond spreads across the eurozone.
French Debt Concerns Push Euro to Lowest Level Since May
The single currency fell as much as 0.8% in early trading, touching $1.1160 during the Asian session—its lowest level since May 2025—before paring some losses to trade down 0.68% at $1.1176. The downward move extends a monthly decline of about 1.2% and follows an eight-cent drop from a peak of $1.20 in January. Investors pointed to escalating anxiety over France’s fiscal position as the driving force behind the sell-off. France’s public debt has reached 119% of its gross domestic product and is projected to climb toward 122%, with the government planning to issue roughly €340 billion in medium- and long-term bonds next year.
Sovereign borrowing costs have reacted sharply to the fiscal pressure. Yields on 10-year French government bonds hit their highest level since 2002 last week. At the same time, the yield gap between French debt and benchmark German Bunds ended last week at 140 basis points, marking a weekly gain of 34 basis points and reaching its widest level since the 2011 sovereign debt crisis before widening further to about 150 basis points. Hauke Siemssen, a strategist at Commerzbank, noted latest bond market dynamics are increasingly concerning and somewhat reminiscent of a sovereign debt crisis
as flight-to-quality patterns favored German paper.
Political Uncertainty in Paris and Madrid Compounds Market Instability
The fiscal strain comes alongside severe political headwinds. Prime Minister Sébastien Lecornu’s minority government announced plans last month for a €54bn (£45.8bn) savings drive aimed at curbing a budget deficit that reached 5.5% of GDP this year. The austerity measures—which involve cutting pensions spending and government department funding while excluding defense—aim to limit next year’s deficit to 5%.
However, markets remain skeptical that these deficit-reduction targets can survive political gridlock, particularly with a presidential election scheduled for April 2027 and Marine Le Pen’s far-right National Rally party gaining ground. Brent Donnelly, president of foreign exchange trading at Spectra Markets, observed that the political pressures anticipated for the winter had arrived sooner than expected. Donnelly also noted that it was difficult to identify mechanisms capable of resolving the problem, adding that current fiscal and budget commitments lacked sufficient credibility given the prospect of approaching leadership changes.
French Fiscal Distress Ripples Across Eurozone Financial Conditions
Analysts have raised alarms that the fiscal distress in France could ripple across the wider monetary union. UniCredit currency strategist Roberto Mialich cautioned that investors do not rule out a further decline toward $1.10 in the near term amid growing political tensions. Meanwhile, Lee Sue Ann, an economist at UOB’s Global Economics & Markets Research, wrote that the upheaval in French sovereign debt was feeding through to broader eurozone financial conditions and complicating the European Central Bank’s policy calculus.
Conversely, the US dollar capitalized on the European turmoil and safe-haven flows. The US Dollar Index rose 0.47% to 102.37, supported by elevated Treasury yields and global debt sell-offs. Matthew Ryan, head of market strategy at Ebury, stated that the dollar is the main winner in the current environment as not only is the rise in Treasury yields boosting the appeal of US assets, but the broad selloff in debt globally is fuelling safe-haven flows into the greenback
. Traders are pricing in an 80% chance of the US central bank holding rates steady in October, compared with 36% a week earlier, following softer-than-expected US employment data reported on Friday, though markets still expect a rate hike in December and two additional hikes in the first half of 2027.