Political and financial risks intensify concerns in Europe, leading the euro to a 17-month low

According to Zhihui Finance APP, the euro fell to its lowest level since May 2025 as investor concerns over political and fiscal risks in Europe intensified. During the Asian trading session, the euro once dropped by 0.8%, reaching 1 euro to 1.1161 US dollars.

Last Friday, the premium investors demanded for holding French government bonds over German bonds of the same maturity rose to a level not seen since 2011. There are reports that Spanish government officials are preparing for early elections, further intensifying the turmoil in the French bond market.

At the same time, hedge fund selling has been a key market feature. According to traders who wished to remain anonymous, Asian fast money funds sold euros and bought US dollars in spot trading. They said this pushed the euro exchange rate down to levels that triggered additional option-related selling.

Homin Lee, Senior Macro Strategist at Lombard Odier Singapore Ltd., stated: "The bond and forex markets are clearly sending a signal that investors are uneasy about the growing instability of the French government and the weakening of the country's fiscal anchoring ability ahead of the 2027 election."

Investors are increasingly concerned about France's political situation. As next year's election approaches, opposition parties seem unwilling to compromise with the outgoing government of French President Emmanuel Macron. According to a poll published last week, far-right candidate Marine Le Pen and far-left competitor Jean-Luc Mélenchon are expected to enter the second round runoff.

JPMorgan strategists, including Meera Chandan, previously pointed out that the euro has not yet reflected changes in the French bond market and noted that the euro remains vulnerable to further selling, especially against the Swiss franc and Japanese yen. They said: "The euro has not yet reflected the widening of OAT yields and related tail risks." "The euro is overvalued against the Swiss franc and may continue to adjust downward."

In addition, a stronger US dollar is also putting pressure on the euro. The market expects that, to curb inflation, the Federal Reserve may have to raise interest rates three more times by July next year. On Monday, the US dollar spot index rose to its highest level since the end of June. Fiona Lim, Senior FX Strategist at Malayan Banking Berhad, said: "The US dollar appears to have digested last Friday's weak employment report, and the market's focus has shifted to the eurozone after a sharp widening of France's credit default swap (CDS) spreads last week." "This has raised market concerns about the fiscal health of other highly indebted peripheral economies in the eurozone, further supporting the strength of the US dollar."