The euro slid to its lowest level against the dollar in more than a year on Monday, October 5, as a deteriorating fiscal picture in France and a surprise snap election in Spain rattled investors in two of the eurozone's largest economies.
The single currency dropped as much as 0.8 percent in Asian trading to touch $1.1160, its weakest level since May 16, 2025, according to data from Bloomberg and LSEG. It recovered modestly by the European open, trading around $1.12–$1.122 and down roughly 0.4 percent on the day. The decline marked a fourth straight week of losses and left the euro down 4.86 percent for the year. Against sterling, the euro sank to an 11-week low of 0.8456.
Currency markets are pointing to two catalysts: mounting worries about France's public finances and fresh political turmoil in Spain. "The increase in volatility for European sovereign spreads has weighed on the euro, and we continue to view the euro as an attractive funding currency in part reflecting this capacity for political risk premium to increase," Morgan Stanley strategists wrote in a note cited by Dow Jones and the Wall Street Journal.
Chris Turner, head of foreign exchange strategy at ING, said the euro's slide reflects a growing risk premium tied to fiscal deficits in countries such as France, adding that the currency risks falling as far as $1.10.
France is the main driver of the euro's weakness. The country's public debt has reached 119 percent of gross domestic product and is projected to swell toward 122 percent, according to a Maybank research report. What is alarming markets most is the government's plan to borrow a record 340 billion euros in 2027 to finance spending and repay maturing debt.
On Friday, yields on 10-year French government bonds climbed to their highest level since 2002, Tradeweb data showed. The spread between French and German 10-year yields widened to 152 basis points, the widest since the eurozone debt crisis of 2011, with one basis point equal to 0.01 percentage point. Borrowing costs in other heavily indebted peripheral economies also surged — Greek and Italian yields jumped — fueling fears of contagion.
Adding to the selling pressure, Japan — the largest foreign holder of French government bonds — has been a persistent seller. Japanese investors held roughly 23 trillion yen of French bonds as of July this year, about 6.6 percent of Japan's total overseas bond holdings, according to Bloomberg data.
The political backdrop is equally shaky. Whether parliament will approve the government's budget remains in doubt, resistance to austerity is running high, and a general election looms in 2027. "Bond and currency markets are clearly signaling investor discomfort about the rising instability of the French government and erosion in the country's fiscal anchor ahead of the elections in 2027," Homin Lee, senior macro strategist at Lombard Odier in Singapore, told reporters.
Spanish Prime Minister Pedro Sánchez announced a snap election for next month, following protests over the country's housing crisis and a heavy defeat for his government in parliament last week. Three people close to Sánchez told Bloomberg that cabinet ministers and Socialist party leaders now see an early ballot as the best response. Spanish 10-year government bond yields climbed to their highest since December 2013 on Friday and have stayed elevated.
Adding further pressure on the euro, financial markets have trimmed expectations for interest-rate increases by the European Central Bank.
The euro's pain is the dollar's gain: the greenback is hovering near an 18-month high against a basket of currencies, supported by expectations of interest-rate rises. Still, the U.S. economy is showing cracks of its own. Nonfarm payrolls rose by just 29,000 in September while the unemployment rate climbed to 4.2 percent, according to the U.S. Bureau of Labor Statistics, data that lifted gold prices as traders scaled back bets on a Federal Reserve rate hike.
For ordinary consumers, a weaker euro means cheaper European imports but shrinking euro-denominated savings. European exporters get a breather, as their goods become more price-competitive abroad. Rate-sensitive sectors, however, face higher refinancing costs as bond yields stay elevated — utilities and real estate are feeling the squeeze first, according to Saxo Markets.
Three things will shape the euro's path in the coming weeks: whether the French parliament passes the government's budget, the outcome of Spain's snap election, and whether the European Central Bank stays the course on rates amid the political turmoil. Traders note that Asia-based hedge funds sold euros for dollars in the spot market on Monday, pushing the currency through option barriers that amplified the decline. Whether this rout turns into a wider storm will likely be decided in Paris and Madrid.