Euro hits lowest since May on French fiscal turmoil

The euro has depreciated to its lowest level against the US dollar since May as France's deepening fiscal crisis and political instability drive investor confidence lower across the 21-member bloc, analysts said. The euro/US dollar exchange rate dropped to 1.11, extending a gradual decline from its January high of 1.21, as France's 10-year bond yield approached 5% for the first time since 2002.

The spread between French and German borrowing costs reached its widest level since the 2012 debt crisis, while the country's budget deficit widened to 5.8% of GDP and total nominal debt hit a historic €3.6 trillion. France has failed to post a budget surplus since 1974, with nominal growth rates dropping below borrowing rates and structural debt deepening amid six prime ministerial changes since 2020.

Political uncertainty compounds economic fragility

Carsten Brzeski, chief economist at ING Germany, said the deepening political turmoil reflects structural problems threatening the bloc's economic stability, noting that Paris has brought its budget deficit below the EU's 3% target only twice in the past two decades. He added that political instability and uncertainty would take a toll on the economy and push France toward stagnation.

Spain's snap elections scheduled for November, triggered by housing market policy disputes, have added to regional uncertainty alongside Italy's persistent debt vulnerability. The Middle East crisis continues to drive up energy costs, fueling volatility in global bond markets while persistent inflation cements downward pressure on the euro's medium-term value.

ECB policy room narrows as dollar strengthens

The European Central Bank's room for monetary maneuver has narrowed as financial turmoil limits options, with market expectations shifting from three rate hikes next year to two 25-basis-point increases. Analysts said selling pressure on the euro is expected to persist as long as structural problems remain unresolved and political tensions continue.

Chris Turner, head of global markets research at ING, said the euro/US dollar exchange rate would continue trading within the 1.10-1.15 range over the next two quarters due to the Federal Reserve's hawkish stance and rising bond yields. He added that further losses could be prevented by a French fiscal consolidation program adopted by parliament, though the White House's strategies following midterm elections would determine the exchange rate's direction.

Safe-haven flows favor Washington

Global capital continues flocking to the US dollar as a safe haven despite Washington's historic debt burden exceeding $40 trillion and lack of spending discipline ahead of midterm elections. The US has avoided global repercussions from its fiscal position even as the eurozone's fragmented national financial markets leave the region vulnerable to shocks despite sharing a common currency.