Euro hits 17-month low as French debt fears widen; dollar strengthens
The single currency fell to US$1.1161 in Asian trading on Monday, its lowest since May 2025, while the US dollar index neared April 2025 highs.
Euro Weakens on French Debt Concerns
The euro reached a 17-month low against the US dollar on Monday, trading at US$1.1161 in Asian hours. This marked its weakest point since May 2025. The single currency was last down 0.62 per cent at US$1.1118, extending its fourth consecutive weekly decline against the dollar.
Concerns over France’s budget deficit and a significant bond market sell-off last week have revived fears of sovereign debt instability within the eurozone. The yield gap between French government bonds and safer German Bunds, a key indicator of investor risk premium, widened to about 150 basis points (bps) on Friday, a level not seen since the 2011 eurozone debt crisis.
It later settled at 145.50 bps, up 5 bps. Hauke Siemssen, a strategist at Commerzbank, noted these market dynamics were “increasingly concerning” and reminiscent of a sovereign debt crisis.
Dollar Gains Amid Federal Reserve Outlook
Concurrently, the US dollar index, which tracks the greenback against six major currencies, climbed 0.39 per cent to 102.33. It earlier touched 102.53, its highest level since 10 April 2025. This rise is partly attributed to shifting expectations for the Federal Reserve's monetary policy.
Traders are now pricing in a 78 per cent probability of the US central bank maintaining current interest rates in October, a sharp increase from 36 per cent just a week prior, according to the CME FedWatch tool. Despite this, market participants still anticipate a rate hike in December 2026, followed by two more in the first half of 2027.
The dollar index had previously traded around 104 before the “Liberation Day” tariff package, unveiled by President Donald Trump in early April 2025, triggered a broad sell-off in US assets.
Yen Strengthens on Policy and Inflation
The Japanese yen, meanwhile, saw appreciation, gaining 0.10 per cent to trade at 157.67 against the dollar. This strength follows recent verbal interventions from Japanese government and authorities cautioning against further yen depreciation. Investor sentiment regarding Japan's fiscal health has also improved, with officials reiterating commitment to fiscal sustainability.
Data released on Friday further supported the yen, showing that annual core inflation in Japan’s capital accelerated in September, reaching its fastest pace in 10 months. This inflation data strengthens the argument for additional interest rate hikes by the Bank of Japan, providing further support for the currency.
The global currency shifts present varied implications for Asian markets. A stronger US dollar increases the cost of dollar-denominated imports for Asian economies, potentially impacting supply chains reliant on these goods.
For investors, the widening French bond spreads could lead to a flight-to-quality effect, driving capital towards perceived safe-haven assets in Asia, such as certain government bonds or stable currencies.
The accelerated inflation in Japan’s capital, at its fastest in ten months, suggests the Bank of Japan may implement further rate hikes, potentially attracting carry trade flows into the yen if the interest rate differential with other major currencies widens.
Asian corporates with significant dollar debt exposures will face higher servicing costs, impacting their financial outlooks for the upcoming Q4 2026 earnings season.
This article is journalism, not investment advice; consult a licensed professional before making financial decisions. Market data is indicative, may be delayed, and should be verified with your broker or exchange before use.
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