The euro sank to its weakest level in 17 months on Monday as a widening French bond spread triggered fears of broader fiscal contagion across the eurozone. A softer U.S. jobs report pushed back Fed rate hike bets, yet the French turmoil still left the dollar on top. Separately, the European Central Bank's chief economist said growth headwinds could limit how much further the bank needs to tighten policy.
The euro plunged to $1.1170, down 0.7%, after earlier sinking to $1.1160, its weakest level since May 2025. It later recovered some ground to trade at $1.1208. The slide marks a fourth consecutive weekly retreat for the single currency.
French bond stress drives the sell-off
A deepening fiscal shock in France is behind the move. French two-year yields jumped 76 basis points on the day, while the spread between 10-year French OATs and German Bunds blew past 140 basis points, its widest since the 2012 eurozone debt crisis. Five-year French credit default swaps soared to 87 basis points.
French 10-year OAT yields added 6 basis points to 4.9196%, while German yields fell around 1 basis point to 3.4466%. According to Saxo strategist Neil Wilson: "France is the real deal in terms of risk premia for the euro." He noted the government's deficit-reduction plans still face a parliamentary process that could water them down.
Dollar gains despite a dovish Fed shift
The greenback's strength comes even as U.S. rate expectations turned more dovish. September payrolls growth slowed to just 29,000, with prior months revised sharply lower. As a result, traders now price a 78% probability that the Fed holds rates steady this month, up from 36% a week earlier. Separately, the CME FedWatch tool showed just an 18% chance of a hike this month, versus 64% a week earlier.
Still, benchmark 10-year Treasury yields stayed supported near 5.26%, as markets continue to discount at least three additional Fed rate increases by mid-2027. That yield advantage, combined with flight-to-safety flows out of European paper, is keeping the dollar on top.
ECB's Lane sees limits on further tightening
The European Central Bank has raised interest rates twice this summer to fight inflation after price growth surged to nearly twice its 2% target. But chief economist Philip Lane said high energy costs, lower budget support and the recent rise in borrowing costs could all weigh on growth, which may limit how much further the ECB needs to tighten. Markets still expect more rate hikes from the ECB, with financial markets pricing two to three additional moves over the coming year, though those bets have swung sharply in recent days.
Sources:
- Investing.com – Asian currencies weaker as dollar surges
- Investing.com – Stocks upbeat, dollar wobbles
- Investing.com – ECB's Lane
Trading involves risk.
Risk Disclaimer
