Euro Slumps to 17-Month Low as French Fiscal Woes Resurface

The euro has fallen to its weakest level against the US dollar in 17 months, as mounting concerns over France's fiscal trajectory and a sharp selloff in French government bonds revive memories of the euro zone's sovereign debt crisis. The single currency sank to $1.1161 in Asian trading on Monday, its lowest since May 2025, before stabilising around $1.12, down 0.47 per cent on the day.

For regional investors and policymakers, the developments underscore the fragility of the global financial system, even as Southeast Asian economies continue to show resilience. The widening spread between French and German bonds, a key gauge of risk, has reached levels not seen since the 2011 crisis, raising questions about the stability of the euro area's second-largest economy.

What is driving the euro's decline?

The primary driver is France's deteriorating public finances. The yield gap between French OATs and safe-haven German Bunds widened to approximately 150 basis points on Friday, the highest since the euro zone's sovereign debt crisis in 2011, before easing to 140 bps. It was last trading 5 bps wider at 145.50.

Market analysts point to a self-reinforcing selloff.

“Latest bond market dynamics are increasingly concerning and somewhat reminiscent of a sovereign debt crisis. Friday's acceleration of the selloff in OAT spreads and flight-to-quality patterns in Bunds are a case in point,”

said Hauke Siemssen, strategist at Commerzbank. He added that the spread selloff appears to feed on itself, creating a dangerous market backdrop.

France's fiscal problems are compounded by political gridlock. With a hung parliament and an upcoming presidential election in 2027, the ability to implement meaningful budget cuts is severely constrained. Planned austerity measures have already sparked protests across the country, particularly in the education sector, deepening the funding crunch.

How does this affect the US dollar?

The dollar index, which measures the greenback against a basket of six major currencies, rose 0.30 per cent to 102.23, after touching 102.53, its highest since April 10, 2025. This level is close to the highs seen before 'Liberation Day', the name given by former President Donald Trump to the sweeping tariff package unveiled in early April 2025.

The Federal Reserve's September rate hike had already diminished the euro's appeal as the primary alternative to the dollar. Traders are now pricing in an 80 per cent chance of the Fed holding rates steady in October, up from 36 per cent a week earlier, according to the CME FedWatch tool. Further hikes are expected in December and the first half of 2027.

For Southeast Asian markets, a stronger dollar typically means increased pressure on regional currencies and capital outflows. However, the region's robust fundamentals and diversified trade links may provide a buffer, unlike the vulnerabilities exposed during the 2011 crisis.

What is the outlook for the yen and Swiss franc?

The Japanese yen remained stable at 157.92, supported by verbal warnings from authorities against excessive depreciation and its safe-haven status. Prime Minister Sanae Takaichi's reiteration of fiscal sustainability has eased concerns about Japan's rising bond yields and public finances. Data released on Friday showed annual core inflation in Tokyo accelerated to its fastest pace in 10 months, bolstering the case for further rate hikes by the Bank of Japan.

The euro also weakened against the Swiss franc, dropping 1.8 per cent since last Thursday to 0.9295.

“Euro/Swiss franc is historically the cleanest way to hedge the euro zone fiscal risk, and we could see further downside,”

said Francesco Pesole, forex strategist at ING. However, he noted that the franc's own fragilities, including low interest rates and central bank intervention risks, may limit its appreciation.

What does this mean for ASEAN investors?

For ASEAN investors, the euro's weakness and dollar strength have several implications. First, a stronger dollar increases the cost of imports and debt servicing in US dollars. Second, it may lead to increased volatility in regional currencies, prompting central banks to intervene. Third, it could affect trade competitiveness, particularly for export-oriented economies like Singapore and Vietnam.

Singapore's model of prudent fiscal management and strong governance remains a benchmark for the region. As the euro area grapples with fiscal indiscipline, ASEAN's commitment to sustainable growth and regional integration becomes even more valuable. The ongoing ASEAN Economic Community initiatives and the region's focus on digital transformation and infrastructure development position it well to navigate global financial turbulence.

FAQ: Key questions on the euro's slide

Why is the euro falling against the dollar?

The euro is falling due to concerns over France's budget deficit and political uncertainty, which have widened the risk premium on French bonds. This has reduced the euro's appeal as a safe-haven alternative to the US dollar.

What is the 'Liberation Day' reference?

'Liberation Day' refers to the tariff package announced by former President Donald Trump in April 2025, which triggered a broad selloff in US assets. The dollar index was around 104 before the announcement, and it is now approaching those levels again.

How does the euro's weakness affect Southeast Asia?

A weaker euro and stronger dollar can lead to capital outflows from emerging markets, including Southeast Asia, and put pressure on regional currencies. However, ASEAN's strong fundamentals and diversified trade may mitigate these effects.

What should investors watch next?

Investors should monitor French bond spreads, upcoming European Central Bank policy signals, and US Federal Reserve decisions. Any escalation in French political tensions could further weaken the euro, while a more hawkish Fed could strengthen the dollar.