The euro fell to a 17-month low against the U.S. dollar on Monday, dropping to $1.1118, its weakest level since May 19, 2025, as concerns over France’s fiscal stability and political uncertainty in both France and Spain rattled markets. The single currency’s decline marked its fourth consecutive weekly fall against the dollar, the steepest in four months, according to LSEG data.
French bond yields surge to crisis-era levels
The yield gap between French government bonds (OATs) and German Bunds—a key indicator of investor risk—widened to 145.5 basis points on Monday, up from 140 bps the prior week. This spread, last seen during the eurozone’s 2011 sovereign debt crisis, reflects growing skepticism over France’s ability to stabilize its public finances. The spread had briefly reached 150 bps on Friday before easing slightly. Analysts at Commerzbank described the bond market dynamics as "increasingly concerning" and "somewhat reminiscent of a sovereign debt crisis."
Political instability fuels market jitters
France’s fiscal challenges are compounded by political uncertainty ahead of the 2027 presidential election, with budget proposals facing skepticism over their feasibility. Economists at Barclays noted that even if France’s draft 2027 budget—aimed at reducing the deficit from 5.4% to 5% of GDP—is adopted, it is unlikely to meet fiscal targets. ING strategists added that the plan would not resolve France’s structural fiscal problems, as aging-related spending and rising interest payments continue to pressure the budget.
In Spain, Prime Minister Pedro Sánchez is expected to call a snap general election, further amplifying concerns over the country’s political stability. The euro also declined sharply against the pound, with sterling rising above €1.18, near its highest level since summer 2024.
Market reactions and broader implications
The euro’s depreciation reflects broader investor unease over the eurozone’s economic outlook, including persistently weak growth, fragmented bond markets, and rising borrowing costs across the region. While the U.S. faces similar pressures, analysts highlight Europe’s unique vulnerabilities, including political fragmentation and debt sustainability concerns.
Hauke Siemssen, strategist at Commerzbank, warned that the sell-off in French bonds "seems to increasingly feed on itself, creating a dangerous market backdrop." The widening spreads and currency depreciation underscore the challenges facing policymakers in addressing fiscal imbalances amid political gridlock.