Euro Slumps to 17-Month Low as French Debt Worries and US Inflation Boost Dollar

The euro dropped to a 17-month low against the dollar, falling as much as 0.8% in early trading to below $1.12, which marks its lowest level since May 2025 according to The Guardian. The single currency has slumped about 1.2% this month, extending a drop from a peak of $1.20 in January.

Market Pressures

Investors sold off the euro due to rising concern over France's budget deficit and debt position, as the government struggles to control public finances ahead of next year's presidential election. France's Cac 40 index fell 1% on Monday, while a snap election announcement in Spain by Prime Minister Pedro Sánchez added to eurozone uncertainty. Meanwhile, bonds from more indebted countries faced heavy selling pressure, pushing French 10-year government bond yields to their highest level since 2002 last week. This pushed the borrowing cost gap between France and Germany to its widest level since 2012. At the same time, German government debt remained favored by investors, and the dollar gained strength partly due to persistent inflation signals in the US economy.

Political Challenges

France's minority government under Prime Minister Sébastien Lecornu announced a €54bn savings drive last month to limit this year's budget deficit of 5.5% of GDP down to 5% next year. President Emmanuel Macron's administration faces intense pressure from strikes and protests while trying to cut pensions and government spending. Investors fear that political pressure, a hung parliament, and gains by Marine Le Pen's National Rally party will derail these budget measures.

Context

Currency values often shift based on the economic health and political stability of a region compared to others. When investors worry about high government debt and political turmoil in countries like France and Spain, they move their money into safer assets like German bonds or the US dollar.