Euro Falls to 17-Month Low as French Debt Fears Rattle Markets

The euro fell to a 17 month low as rising French borrowing costs and widening bond spreads intensified concerns over the country’s fiscal position. The market stress is putting pressure on French bonds, European equities and the euro while investors closely watch France’s budget plans and the ECB’s response.

The euro fell to a 17-month low against the U.S. dollar on Monday as investors grew more worried about France's public finances and political uncertainty, pushing French borrowing costs sharply higher.

The common currency dropped as low as $1.1161, its weakest level since May 2025, before trading around $1.1118, down 0.62%, according to Reuters. The slide followed four consecutive weekly losses and a sell-off in French government bonds.

The gap between French and German 10-year yields reached about 150 basis points on Friday, its widest since the euro zone's sovereign-debt crisis in 2011, before narrowing to about 145.5 basis points on Monday. A wider spread means investors are demanding more compensation to hold French debt than German debt, the euro zone's safer benchmark.

France's own 10-year yield climbed close to 5%, a level last seen in 2002. The pressure reflects doubts over the government's ability to rein in its budget deficit amid political uncertainty and resistance to fiscal measures.

France's debt burden is already heavy and, on current policies, set to grow. The European Commission forecasts public debt rising from 115.6% of GDP in 2025 to 118.1% in 2026 and 120.2% in 2027. It expects the budget deficit to hold at 5.1% of GDP this year before widening to 5.7% in 2027 under unchanged policies.

Higher yields make that arithmetic harder. The Commission expects French interest payments to climb to 2.6% of GDP in 2026 and 2.8% in 2027.

The strain is spreading beyond government bonds. French banks have come under pressure, and investors have shifted toward German bonds and other assets seen as safer. Broader European equities have held up comparatively well, Reuters reported, partly because a weaker euro can help exporters and markets have scaled back expectations of further European Central Bank rate increases.

The bond-market stress is weighing on the euro because investors are reassessing both European monetary policy and the region's fiscal stability. Reuters reported that markets have cut expectations of another ECB rate increase this year as the French turmoil adds to economic and political uncertainty.

The dollar, meanwhile, has gained from its role as a reserve and safe-haven currency. The dollar index rose to 102.33, its highest since April 2025.

The ECB has tools for severe market stress, including its Transmission Protection Instrument. But a Reuters analysis found that intervening in France's bond market would raise significant legal and policy questions, particularly because the pressure stems from concerns over France's fiscal position and political uncertainty.

What Investors Are Watching Next

The immediate test is whether France can draft and pass a credible budget that limits further damage to its public finances. Investors are also watching whether higher French borrowing costs spread to other euro-zone bond markets.

The central question is whether the rise in French yields stays contained or turns into wider euro-zone stress. The euro, the French-German spread, European bank shares and ECB rate expectations are likely to remain the key indicators.

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