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The euro has fallen to its weakest level against the U.S. dollar in 17 months.
The euro dropped as low as $1.1161 on Monday, October 5, its lowest level since May 2025, after four consecutive weeks of declines. It later recovered some of those losses but remained under pressure as investors continued to sell off French assets.
The biggest concern is France, the eurozone’s second-largest economy.
France is struggling with a large budget deficit, rising borrowing costs and a national debt burden that reached about 119% of economic output in the second quarter. The government wants to reduce the budget deficit from an estimated 5.4% of GDP in 2026 to 5% in 2027, using a package that includes spending restraint and tax changes worth about €54 billion.
Investors are not convinced that the plan will work.
Prime Minister Sébastien Lecornu’s government faces a deeply divided parliament, public opposition to spending cuts and a presidential election scheduled for April and May 2027. That combination has raised doubts over whether France can push through the measures needed to stabilize its finances.
Those concerns are showing clearly in France’s bond market.
The yield on France’s 10-year government debt briefly moved above 5% last week, its highest level since 2002. More importantly, the gap between French and German 10-year borrowing costs widened above 150 basis points on Friday, reaching its highest level since the eurozone sovereign debt crisis in 2011. That spread is closely watched as a measure of how much extra risk investors see in holding French debt rather than German government bonds.
France also plans to sell a record €340 billion of medium- and long-term debt in 2027, adding to concerns about how much investors will demand to finance the country as older low-cost debt matures.
The pressure is no longer limited to France.
Spain added another source of political uncertainty on Monday when Prime Minister Pedro Sánchez called a snap general election for November 29, after parliament rejected key housing measures. The market reaction in Spanish assets was relatively contained, but the announcement added to concerns about political instability across major eurozone economies.
French stocks were among Europe’s weakest. The CAC 40 fell about 0.9% in Monday morning trading and touched a six-month low, while the broader STOXX 600 remained slightly higher.
The euro’s fall is also notable because it came even as expectations for another immediate U.S. interest-rate increase declined.
The United States added only 29,000 jobs in September, well below the 90,000 expected by economists surveyed by Reuters, while unemployment rose to 4.2%. The weak report sharply reduced expectations that the Federal Reserve will raise rates again at its October meeting.
Normally, lower expectations for U.S. interest rates could weaken the dollar and support the euro.
That has not been enough this time.
The dollar remained firm as investors focused more heavily on Europe’s fiscal problems, high government borrowing costs and political uncertainty. The euro’s weakness therefore appears to be driven less by a sudden improvement in the U.S. outlook and more by growing concern about risks inside the eurozone itself.
The situation does not mean that Europe is already facing another sovereign debt crisis. The European Central Bank has tools it could use if financial conditions became disorderly, although current market moves may not meet the conditions required for direct ECB intervention.
For now, investors are watching whether France can convince parliament and financial markets that its deficit-reduction plan is credible.
If French borrowing costs remain elevated, political uncertainty increases, or pressure spreads more clearly into other eurozone bond markets, the euro could remain vulnerable. stabilizing French bond yields would provide the clearest sign that A successful budget process and stabilization in French bond yields would provide the clearest signs that the current pressure is beginning to ease.
