Dollar Rises as Euro Sinks to 17-Month Low on France Debt Crisis

The U.S. dollar edged higher on Monday, lifted by a sharp slide in the euro to its weakest level in nearly 17 months as France's fiscal troubles deepened. The dollar index, which tracks the greenback against six major peers, climbed 0.2% to 102.14, its highest since April 9, 2025.

The euro was last down 0.3% at $1.1222, after earlier touching $1.1161, its lowest since May 16, 2025. Currency desks in Europe spent the session digesting a widening fiscal shock in France, where rising public debt and political gridlock ahead of next year's presidential election have forced a repricing of sovereign risk.

French Bonds Sell Off Hard

The stress showed up violently in French government paper. Two-year yields jumped 76 basis points on the day. The spread between 10-year French OATs and benchmark German Bunds blew past 140 basis points, the widest since the Eurozone debt crisis in 2012. Five-year French credit default swaps soared to 87 basis points, with traders pricing in the risk of fiscal contagion across the single-currency bloc.

France last week unveiled its 2027 budget bill, targeting a public deficit of 5% of gross domestic product through proposed spending cuts of 54 billion euros ($60.59 billion). The country's deficit is projected to reach 5.4% of GDP this year, with public debt approaching 120% of GDP.

"Europe has moved to the forefront of the challenges facing global bond markets, and its sluggishness has meaningfully strengthened the greenback, as difficult politics that impede fiscal discipline, in conjunction with a regulatory culture that limits economic expansion, make budget balancing almost impossible because revenue and spending differentials continue to widen," said José Torres, senior economist at Interactive Brokers.

U.S. Yields at Multi-Decade Highs

In the United States, Treasury yields surged as bonds were dumped. The benchmark 10-year yield rose 2.9 basis points to 5.309%, while the 30-year added 3 basis points to 5.660%. Both were hovering at multi-decade highs.

Shorter-term bonds had found some relief last week after U.S. data dented expectations of imminent Federal Reserve tightening. The Fed's preferred inflation gauge showed a moderation in annual growth, while an unexpectedly weak nonfarm payrolls report hinted at a slight cooling in the labour market.

Odds of a quarter-point rate hike by the Fed later this month fell to around 20% at the end of last week, down from about 70% at the start of the week, according to the CME FedWatch tool.

Quiet Data Week

The economic calendar is light this week, with the minutes of the Fed's last interest rate meeting as the main highlight. On Monday, the Institute for Supply Management's September report on the U.S. services sector showed activity slowing from August but staying above expansion territory. The measure of prices paid by services businesses accelerated to its highest reading since July 2022.

"There is a bit of an early month lull in the data calendar this week," analysts at Lloyds Bank said. "The main focal point will be the final services and composite PMI reports (Mon), which should offer more granular color from across the Eurozone and perhaps include more detail on the effect of the rise in energy during the month, which had little impact on the early estimates," they added.

A stronger dollar and rising U.S. yields typically tighten financial conditions for emerging markets, including Nigeria, where they can pressure the naira and raise the cost of dollar borrowing for businesses.