Euro hits 17-month low as French debt fears, US inflation lift dollar

On Monday, the euro hit a 17-month low against the dollar, falling to $1.1211 after declining as much as 0.8% to $1.116. This significant drop was driven by growing concerns over France's ability to control its budget deficit, raising fears of a potential euro-zone debt crisis. French government bonds have suffered pressure due to expectations of higher interest rates and heightened political uncertainty ahead of the country's 2027 election.

The yield spread between French bonds and German Bunds widened to nearly 160 basis points on Friday, its highest level since the 2011 euro-zone sovereign debt crisis. However, it later narrowed to 137 basis points. Investors have favored traditional safe-haven assets like German government debt over French debt amid fiscal and inflation concerns.

Meanwhile, US inflation pressures supported the greenback, with the dollar index rising 0.26% to 102.16 after reaching a high of 102.53, its highest since April 10, 2025. Despite expectations of a Federal Reserve rate increase this month falling sharply, concerns about euro-zone debt and persistent US inflation have bolstered the dollar. The Institute for Supply Management's non-manufacturing purchasing managers' index fell to 54.9 in September, indicating contraction rather than expansion.