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Euro hits 17-month low as French debt fears, US inflation lift dollar

By Sohail Khan 6 October 2026, 1:13 am

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Euro hits 17-month low as French debt fears, US inflation lift dollar
Synopsis

The euro reached a 17-month low against the dollar due to worries over France's budget deficit. Concerns about a potential euro-zone debt crisis have heightened market caution amid political uncertainty. Bonds from more indebted countries faced selling pressure, while German government debt remained favored. The dollar gained in strength partly due to persistent inflation signals in the US economy.

Euro hits 17-month low as French debt fears, US inflation lift dollar<br> — The euro was down 0.37% at $1.1211 after falling as much as 0.8% to $1.116, its weakest level since May 2025.

The euro fell to a 17-month low against the dollar on Monday as concerns over France’s ability to contain its budget deficit fuelled fears of a potential euro-zone debt crisis. Persistent US inflation pressures further supported the greenback, Reuters reported.

French government bonds have come under pressure as expectations of higher interest rates and growing political uncertainty ahead of the country’s 2027 election raise doubts about whether the euro zone’s second-largest economy can stabilise its public finances.

Eurozone bond yields diverged again, although the moves were less pronounced than late last week. Investors favoured traditional safe-haven assets such as German government debt over bonds issued by more indebted countries amid mounting fiscal and inflation concerns.

The yield spread between French bonds and benchmark German Bunds—a measure of the extra return investors demand to hold French debt—widened to nearly 160 basis points on Friday, its highest since the euro-zone sovereign debt crisis in 2011. The gap later narrowed by about four basis points to 137.

“It just seems to me like the market is rejecting this 2027 budget. There’s an election coming up … who’s going to vote for fiscal austerity with elections coming up?” said Erik Bregar, director of FX and precious metals risk management at Silver Gold Bull in Toronto.

“That French story probably is the biggest FX story of the week. On Friday, they were 160 French over Bunds; now it’s 135. That probably explains the euro’s bounce in the morning off the lows.”

According to Reuters report, the euro was last down 0.37% at $1.1211 after falling as much as 0.8% to $1.116, its weakest level since May 2025. The currency is coming off a fourth consecutive weekly decline against the dollar, its longest losing streak since May 2025, after dropping 3.1% over the period.

Dollar gains on inflation concerns

Although expectations of a Federal Reserve rate increase this month have fallen sharply, concerns about euro-zone debt and US data pointing to persistent inflation have supported the dollar.

The Institute for Supply Management said its non-manufacturing purchasing managers’ index slipped to 54.9 in September from 55.4 in August. The reading was slightly below the 55.2 forecast in a Reuters poll but remained above the 50 mark separating expansion from contraction.

The survey’s measure of prices paid by businesses for inputs increased to 74.0 from 72.6 in August, reinforcing concerns about lingering inflation.

Markets now see a 23.8% probability of the Fed raising rates by at least 25 basis points at its October meeting, according to the CME FedWatch Tool, down from 70.9% a week earlier. Expectations of a December increase remain high, with traders pricing in an 86.8% probability.

The dollar index, which tracks the US currency against a basket of peers, rose 0.26% to 102.16 after touching 102.53, its highest since April 10, 2025.

Japan pledges bond control

The dollar strengthened 0.09% against the yen to 157.97. Verbal warnings from Japanese authorities about the yen’s depreciation, along with the currency’s traditional safe-haven status, have done little to arrest its recent weakness.

Japanese Prime Minister Sanae Takaichi pledged to “control” bond issuance and respond swiftly to market turbulence as the government sought to reassure investors concerned about the country’s deteriorating public finances and rising bond yields.

Separately, a business survey showed that Japan’s services sector expanded at a slower pace in September as growth in activity and new orders weakened and earthquake-related disruptions weighed on demand.

Sterling slipped 0.14% to $1.3223 but gained about 0.2% against the euro.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The )

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