The euro fell to a 17-month low against the dollar on Monday as a French bond sell-off and political uncertainty in Spain weighed on the single currency. France's widening borrowing-cost premium over Germany and a possible snap election in Spain both fed the move, while the dollar drew support from a shift in Fed rate expectations.
Euro drops to $1.12 as French debt worries mount
The euro weakened 0.6% against the dollar to $1.12 during early trading in London on Monday, its lowest level in 17 months. The currency has fallen more than 1.6% since the start of last week and is down almost 5% against the US currency this year.
The slide follows a sell-off in French government debt that accelerated last week. Yields on 10-year French bonds climbed to 4.9%, up 1.2 percentage points since the end of June, as investors grew wary of Paris's failure to bring its deficit back within 5% of GDP. The premium of French 10-year borrowing costs over Germany's ended last week at 140 basis points, after gaining 34 basis points, its biggest weekly jump in 17 years.
Barclays economists said the French government had presented a draft outline of its 2027 budget aimed at cutting the deficit from 5.4% of GDP to 5% next year, but added the country is unlikely to meet its fiscal targets even if the plan passes.
Spain adds to the pressure
Investors are also watching Spain, where Prime Minister Pedro Sánchez is expected to call a snap election after his flagship housing bill was rejected last week, with protests over the country's housing crisis reaching a boiling point. Investors are worried that the rise of populist parties ahead of France's presidential election next year could worsen the outlook further.
According to the Financial Times: "The politics of Europe are really starting to deteriorate," said Eric Robertsen, head of global research and chief strategist at Standard Chartered. Analysts cautioned the risks were nowhere close to those of the Eurozone crisis, with one strategist calling comparisons to 2012 well off the mark. Robertsen added that higher energy prices were pushing up inflation at a time when growth is poor.
Dollar gains as rate-hike bets ease
The dollar also drew strength from shifting Federal Reserve rate hike expectations. Traders are now pricing in a 78% chance the Fed holds rates steady in October, compared with 36% a week earlier, even after September job growth slowed more than expected. The broad sell-off in global debt has fuelled safe-haven flows into the greenback, pushing the dollar index up 0.47% to 102.37.
Sources: Financial Times, CNBC, Reuters via Investing.com
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