The euro fell sharply on Monday, dropping to its lowest level in 17 months as mounting fiscal concerns in France increased fears of wider instability across the eurozone.
The decline came as investors continued to react to a severe selloff in European bond markets. At the same time, the US dollar remained firm despite weaker US employment data that reduced expectations for an immediate Federal Reserve rate hike.
Euro Drops to Lowest Level Since May 2025
The euro fell as low as $1.1161 during Asian trading, marking its weakest level since May 2025.
The currency has now posted four consecutive weekly declines, with pressure building as investors focus on France’s high debt levels and growing political uncertainty ahead of the country’s 2027 election.
The euro was later trading around 0.68% lower at $1.1176.
It also weakened against other major currencies, falling approximately 0.5% against the Swiss franc and 0.39% against the British pound.
French Fiscal Concerns Weigh on Sentiment
France’s worsening fiscal outlook has become a major concern for currency and bond markets.
Chris Weston, head of research at Pepperstone, warned traders against expecting an immediate recovery in the euro, arguing that the current move reflects a continuation of broader fiscal concerns.
He also suggested that early signs of contagion risk may be starting to appear.
Brent Donnelly, president of foreign-exchange trading at Spectra Markets, said political concerns that many investors expected to emerge closer to France’s April 2027 election are already affecting markets.
The approaching election could make it more difficult for the French government to convince investors that future budget commitments will remain credible.
Eurozone Contagion Fears Increase
The combination of falling French bond prices and a weaker euro has raised concerns that France’s problems could spread to other parts of the eurozone.
Some investors have drawn comparisons with the European sovereign debt crisis more than a decade ago.
If financial stress increases significantly, pressure could build on the European Central Bank to intervene or provide additional support to stabilise French government debt.
However, analysts remain divided over whether the situation represents a wider eurozone crisis.
Ninghui Liu, head of investment strategy and research for APAC at State Street Investment Management, said France’s fiscal position is becoming increasingly unstable.
However, he argued that the current market reaction remains primarily a France-specific problem rather than a broader euro crisis.
Liu added that other European countries could eventually step in if financial pressure intensifies, particularly if the stability of the European Union comes under threat.
French Bonds Remain Under Pressure
Global bond markets are still recovering from a sharp selloff that pushed borrowing costs to multi-decade highs.
French government debt has been hit especially hard as investors worry about fiscal sustainability, inflation risks and the economic impact of higher oil prices.
French bond futures slipped around 0.22%, remaining close to recent record lows.
By comparison, German Bund futures gained approximately 0.1%, reflecting increased demand for safer European government debt.
The gap between French and German 10-year borrowing costs widened significantly.
France’s 10-year yield premium over Germany ended the previous week at around 140 basis points, after increasing by 34 basis points. That represented its largest weekly rise in 17 years.
US Dollar Benefits From Safe-Haven Demand
The US dollar emerged as one of the main beneficiaries of the latest market uncertainty.
The dollar index, which measures the US currency against six major rivals, rose approximately 0.47% to 102.37.
Sterling declined to around $1.3205, while the Japanese yen traded near 157.92 per dollar.
Matthew Ryan, head of market strategy at Ebury, said higher US Treasury yields have increased the attractiveness of dollar-denominated assets.
At the same time, the global bond selloff has encouraged investors to seek safety in the US currency.
US Jobs Data Reduces Fed Rate Hike Expectations
Despite the dollar’s strength, weaker US employment data has reduced expectations for another immediate Federal Reserve interest rate increase.
US job growth slowed more than expected in September, causing traders to reassess the near-term outlook for monetary policy.
Markets are now pricing in around a 78% probability that the Federal Reserve will leave interest rates unchanged in October, compared with roughly 36% one week earlier.
However, traders still expect another rate increase in December, followed by two additional hikes during the first half of 2027.
Euro Outlook Remains Tied to France
The euro’s near-term direction is increasingly linked to developments in France’s bond market and fiscal outlook.
If borrowing costs continue to rise and political uncertainty intensifies, pressure on the single currency could persist.
For now, investors are watching closely for signs that France’s fiscal problems are spreading to other eurozone countries.
Any evidence of broader contagion could increase volatility across European bonds, currencies and equity markets while strengthening demand for traditional safe-haven assets.
