Concerns about the spread of French government bond risks intensify, making it difficult to stop the euro’s decline

智通财经2026/10/06 03:36

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(1) The euro continues to weaken, becoming the latest warning sign as France's soaring borrowing costs spread to the broader eurozone market. On Monday, the euro fell below 1.12 against the US dollar, hitting a 17-month low, and also dropped significantly against the British pound, Swiss franc, and Japanese yen. (2) The French government is pushing a controversial 2027 budget plan aimed at reducing the fiscal deficit and controlling record debt. However, deep divisions in parliament and parties preparing for next year's presidential election make this goal difficult to achieve. Investors are selling French government bonds and shifting to German bunds for safety. The yield spread between French and German bonds has reached its widest level since the eurozone debt crisis of 2010–2012, raising market concerns about the risk spreading to other eurozone countries. (3) Analysts state that the factors that supported the euro this summer have disappeared. Previous market expectations that the energy shock would be brief and that the US intended to push the dollar lower have faded. According to Bank of America, every 10 basis point widening of the France-Germany spread could lower the euro/dollar by 0.4%; Goldman Sachs says this effect could intensify significantly during periods of severe market stress. (4) Andreas König, Global Head of FX at AXA Investment Managers, noted that the euro/dollar pair is usually more influenced by US news, but Europe is also having an impact this time; he does not expect a turnaround in the medium term and continues to overweight the US dollar. CFTC positions show traders are bearish on the euro, and the three-month euro risk reversal indicator fell last Friday to its most bearish level since 2024. (5) Analysts suggest the euro may test $1.10; Societe Generale's Juckes also highlights the euro's vulnerability to the yen and Swiss franc, noting that the euro has fallen nearly 4% against the yen in September.

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The euro continues to decline, becoming the latest warning sign that France’s surging borrowing costs are spilling over into the broader eurozone market. On Monday, the euro fell below 1.12 against the US dollar, hitting a 17-month low, and also saw significant drops against the pound, Swiss franc, and Japanese yen.
The French government is pushing a controversial 2027 budget plan aimed at reducing the fiscal deficit and controlling record-high debt, but severe divisions in parliament and political maneuvering ahead of next year’s presidential election make the goal challenging. Investors are selling off French government bonds and turning to German bonds as a safe haven. The yield spread between French and German government bonds has reached its widest level since the 2010–2012 eurozone debt crisis, raising concerns in the market that the risk could spill over to other eurozone countries.
Analysts say the factors that supported the euro this summer have now disappeared. The previous market views that the energy shock would be short-lived and that the US intended to push for a weaker dollar have faded. Bank of America estimates that for every 10 basis point widening in the France-Germany spread, the euro will fall 0.4% against the dollar; Goldman Sachs notes that in times of severe market stress, this impact can increase significantly.
Andreas König, Global Head of FX at AXA Investment Managers, said that the EUR/USD rate is usually more influenced by US dollar news, but this time, European factors have also played a role. He does not expect a turnaround in the medium term and maintains an overweight position on the US dollar. CFTC positions show traders are bearish on the euro, and the three-month euro risk reversal indicator fell to its most bearish level since the start of 2024 last Friday.
Analysts state the euro could test 1.10 dollars; Juckes from Société Générale also emphasizes the euro’s vulnerability against the yen and the Swiss franc, noting that the euro has fallen nearly 4% against the Japanese yen in September.

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Japanese Prime Minister Sanae Takaichi defended her absence from the online meeting of the Group of Seven (G7) and responded via social media to critics questioning why she did not attend despite what appeared to be a free schedule. She posted, "This meeting was arranged at short notice by the rotating chair France, and it was permissible to send a representative. To my knowledge, UK Prime Minister Burnham did not personally attend but sent a delegate instead; European Council President Costa was also absent." According to local media reports, Takaichi was at her official residence during the meeting and did not meet with anyone. She wrote, "Although the meeting ultimately decided to coordinate the release of 100 million barrels of oil reserves, Japan had already been releasing reserves beforehand and currently has no plans for new measures." Takaichi added that Vice Minister of Foreign Affairs Kazuya Endo attended the meeting on her behalf.

智通财经•2026/10/06 05:06