Euro plummets against US dollar: has the next crisis begun?

In early trading on Monday, the euro hit a 17-month low against the US dollar, falling to $1.12, the lowest level since early 2025. This decline is attributed to a revaluation of investor expectations regarding the US Federal Reserve's potential interest rate hikes, driven by rising global bond yields. However, the latest sell-off was triggered by specific concerns over France's fiscal situation.

France's 10-year government bond yield reached a 5% level, reflecting investor doubts about its long-term viability. The country has been grappling with significant fiscal issues since President Emmanuel Macron's government took office in May 2017. While Macron implemented tax cuts, public spending increased, leading to a surge in France's national debt by more than €1 trillion.

The debt-to-GDP ratio now stands at nearly 118%, and the annual budget deficit remains consistently above 5%, surpassing the 3.4% threshold when Macron assumed office. This fiscal instability has contributed to investor concerns, prompting them to seek perceived safer options like German government debt.

The widening gap between French and German government bond yields, reaching its highest level since the eurozone debt crisis, has intensified worries about EU financial stability. Deutsche Bank's Jim Reid warned that the spread between the two bond yields had become so wide that a "mini-panic" was imminent.

The European Central Bank (ECB) faces a challenging situation, as it must address these concerns without exacerbating the already strained French bond yields. Policy makers are closely monitoring the developments, but there is uncertainty about whether this marks the beginning of a new sovereign crisis or if market reactions have overreacted.