Euro falls to 17-month low against the USD on French debt concerns

The euro slid to its lowest level in 17 months against the dollar on Monday due to concerns over France's high debt and deficits, which have caused government bond yields to rise sharply. A weak 2027 budget plan released last week exacerbated worries that government spending will remain high ahead of the upcoming presidential elections in which far-right candidate Marine Le Pen, known for fiscal populism, could win.

This has rattled bond investors at a time when global economies are grappling with rising interest rates and borrowing costs aimed at combating inflation. French debt is expected to reach nearly 122% of the country's GDP next year, even with planned spending cuts totaling billions of euros, driving the 10-year government bond yield to 4.8%, the highest since the 2011 eurozone crisis.

Kathleen Brooks, research director at XTB, noted that the selling off of French bonds and the euro, with potential for continued downward momentum, indicates that Europe is losing favor among investors, and bond market vigilantes are closely monitoring developments in the eurozone. Prime Minister Pedro Sanchez's call for snap elections in Spain also startled investors after lawmakers rejected a housing relief bill from his Socialist-led minority government.

Patrick Munnelly, market strategist at Tickmill Group, added that France's fiscal credibility and political stability have already been under scrutiny, and Spain's uncertainty further weighs on Europe's political risk. While stocks, including the Nasdaq and Dow, were generally higher following weak US jobs data and a near-record high, this optimism was tempered by Schneider Electric's sharp decline after announcing a $22.6 billion all-cash deal to acquire US engineering software specialist PTC, which caused its share price to drop nearly 10%.

Lower oil prices, following G7 countries releasing 100 million barrels of diesel and crude oil to ease supply concerns, provided additional support. Notably, exports of Middle East oil, excluding Iran, surpassed pre-war levels despite ship attacks in the Strait of Hormuz, according to Kpler data.