The euro dropped to $1.116 during Asian trading before stabilizing near $1.1211, as mounting concerns over France’s budget deficit and persistent US inflation pressures strengthened the greenback. The decline marks the currency’s fourth consecutive weekly loss, its longest losing streak since May 2025.
The Bottom Line
- French Debt Contagion: The yield spread between French 10-year bonds and German Bunds widened significantly, reflecting deepening investor anxiety over the euro zone’s fiscal stability ahead of the 2027 presidential election.
- Greenback Strength: The US dollar index climbed to 102.16, bolstered by ISM data showing firm input prices and strong expectations for Federal Reserve policy paths.
- Broader European Strain: Political instability expanded across the continent as Spain called a snap general election, adding to downward pressure on European indices and testing regional bond markets.
Selling Pressure on French Government Bonds
French government bonds faced intense selling pressure as markets rejected Paris’s latest fiscal trajectory. French Finance Minister Roland Lescure insisted last week that the nation remained a solid borrower, unveiling a 2027 budget aimed at cutting the deficit from 5.4% of Gross Domestic Product to 5%, Euronews reported. However, expectations of higher interest rates and growing political uncertainty ahead of the upcoming presidential election raised severe doubts regarding the second-largest euro-zone economy’s ability to stabilize public finances.
The yield spread between French bonds and benchmark German Bunds widened to nearly 160 basis points on Friday—its highest level since the euro-zone sovereign debt crisis in 2011—before narrowing to approximately 135 to 137 basis points as the euro bounced off its intraday lows. According to market data provider LSEG cited by Euronews, France’s 10-year yield rose to 4.917% in early trading on Monday, remaining near the 24-year high touched late last week.
It just seems to me like the market is rejecting this 2027 budget. There’s an election coming up … who’s going to vote for fiscal austerity with elections coming up?
said Erik Bregar, director of FX and precious metals risk management at Silver Gold Bull in Toronto, as reported by economictimes.indiatimes.com.
| Bond / Asset Index | Yield / Value | Change / Movement |
|---|---|---|
| French 10-Year Yield | 4.917% | Near 24-year high |
| French-German Yield Spread | ~135–137 bps | Widened from historical norms (touched 160 bps) |
| Dollar Index (DXY) | 102.16 | Up 0.26% |
| Euro (EUR/USD) | $1.1211 | Down 0.37% (touched 17-month low of $1.116) |
US Inflation Metrics and Federal Reserve Policy Expectations
While expectations of a Federal Reserve rate increase at the October meeting dropped sharply, persistent US economic data underpinned the American currency. The Institute for Supply Management reported that its non-manufacturing purchasing managers’ index slipped to 54.9 in September from 55.4 in August, remaining above the 50 expansion threshold.
The survey’s measure of prices paid by businesses for inputs increased to 74.0 from 72.6 in August, reinforcing market apprehensions about lingering inflation pressures. According to the CME FedWatch Tool, markets priced in a 23.8% probability of the Fed raising rates by at least 25 basis points in October, down steeply from 70.9% a week earlier. Meanwhile, traders maintained an 86.8% probability for a rate increase in December.
Wider Eurozone Contagion and Spanish Political Uncertainty
Fiscal strains extended far beyond Paris. Spain introduced additional political volatility on Monday when Prime Minister Pedro Sánchez called a snap general election for November 29, following the parliamentary rejection of two minority housing decrees, Euronews reported. Spanish 10-year yields remained steady between 4.07% and 4.09%, leaving its risk premium over German debt at roughly 65 basis points.
Last week’s sell-off also affected Italian, Belgian, and Greek sovereign debt. Analysts at Belgian bank KBC noted clear contagion toward Belgium and Italy, where Italy’s premium over Bunds neared 110 basis points, as Euronews reported. European Central Bank President Christine Lagarde acknowledged in an interview with French daily La Croix that a debt load close to 120% of GDP left unchecked is a serious matter, though she asserted that current conditions do not mirror the crises of 2008 or 2011.
Japanese Yen Interventions and Global Market Reactions
European equities opened mixed in response to the macroeconomic strain. The Euro Stoxx 50 declined 0.4%, while France’s CAC 40 dropped more than 1%. Across global foreign exchange desks, sterling slipped 0.14% against the dollar to $1.3223 while gaining approximately 0.2% against the weakening euro, according to economictimes.indiatimes.com.
