Euro Nears 17-Month Low on French Debt Concerns

The euro began the week trading below $1.12, hovering near its weakest level in 17 months, as investors weighed France’s record-high debt and political challenges to implementing budget cuts against the resilience of the US economy and the strength of the dollar. France’s budget plans for 2027 aim to reduce the fiscal deficit to 5% of GDP, but concerns are mounting over whether the government can secure parliamentary approval for substantial spending cuts amid a deeply divided parliament, particularly with next year’s presidential election approaching. Meanwhile, Brent crude prices edged lower as easing concerns over supply risks prompted traders to scale back expectations for further central bank rate hikes. Markets are also looking ahead to Wednesday’s US CPI data for clues about the Federal Reserve’s interest-rate outlook, while eurozone central bankers are scheduled to deliver speeches during the IMF-World Bank annual meetings in Bangkok this week.

The euro rebounded above $1.12 after hitting a 17-month low of $1.1161 earlier this week, supported by stabilizing French bond markets and easing energy prices and US Treasury yields, which weakened the dollar’s rally. However, the common currency remained on track for a fifth consecutive weekly decline, with cumulative losses of around 3% against the dollar, as investors weighed France’s record-high debt and the political challenges of implementing budget cuts against a resilient US economy and stronger dollar. Meanwhile, Brent crude retreated from its recent rally after US President Donald Trump said Washington would not launch an attack on Iran before the November midterm congressional elections, citing productive talks aimed at ending the conflict. The easing in oil prices prompted traders to scale back expectations for central bank rate hikes, with the ECB deposit rate now priced to rise from 2.50% currently to 2.72% by December and 3.20% by late 2027.

The euro weakened below $1.12, moving closer to a 17-month low of $1.116 touched earlier this week, as elevated energy prices, rising inflation and interest rate expectations, and fiscal concerns, particularly in France, continued to weigh on sentiment. Markets now price roughly 75 basis points of ECB and 85 basis points of Fed tightening by the end of next year, as oil prices rebounded after Iran intensified attacks on shipping in the Strait of Hormuz. Meanwhile, French bonds remain under pressure as political uncertainty ahead of the 2027 election raises doubts over the country’s ability to repair its finances. The minority government has unveiled a plan to cut the budget deficit, although the fiscal watchdog warned that its economic assumptions were “optimistic.” Political uncertainty is also rising elsewhere, with Spain calling a snap election for November 29 and Italy heading to the polls next year.