Key facts
- The euro fell to a 17-month low against the dollar, trading below $1.12.
- Concerns over France's rising debt costs and fiscal position are fueling the euro's decline.
- The yield on French 10-year government bonds reached its highest level since 2002 last week.
- The spread between French and German borrowing costs widened to its largest since 2012.
- Spain's prime minister announced a snap election on Monday.
- Analysts warn that stresses in the French bond market could spread to other euro area countries.
The euro fell to a 17-month low against the dollar on Monday, trading below $1.12, as growing concerns over France's fiscal position and rising debt costs rattled markets. The sell-off accelerated a drop of about 1.2% this month, with investors worried that France's stretched public finances could threaten the stability of the wider eurozone bloc.
Investors are particularly focused on Paris's fiscal position ahead of next year's presidential election. The yield on French 10-year government bonds reached its highest level since 2002 last week, pushing the spread between French and German borrowing costs to its widest level since the height of the eurozone sovereign debt crisis in 2012. This widening gap signals increased investor concern about France's creditworthiness.
The French government, led by Prime Minister Sébastien Lecornu, announced plans last month for a €54bn savings drive to curb borrowing, aiming to reduce the budget deficit from an estimated 5.5% of GDP this year to 5% next year. However, analysts fear political pressures, including potential gains by the far-right National Rally party and ongoing strikes and protests, could derail these fiscal consolidation efforts.
Adding to eurozone uncertainty, Spain's Prime Minister Pedro Sánchez announced a snap election on Monday following political deadlock. This development, coupled with the situation in France, has heightened investor worries about political stability across the bloc.
Analysts warned that the stresses in the French bond market could spread to other euro area countries, potentially reigniting fears of a return to the sovereign debt crisis dynamics of the 2010s. The European Central Bank faces challenges from mounting inflationary pressures and the risk of contagion from France's debt problems.