Why the euro fell to a 17-month low against the dollar: France's budget and the OAT-Bund spread

The euro fell as low as $1.1161 against the dollar at 03:07 UTC on Monday, October 5 (11:07 p.m. ET on Sunday), its weakest level since May 2025 and 0.76% below Friday's close of $1.1246, according to MoveSurge's one-minute EUR/USD bars. The selling came from France's bond market, where the extra yield investors demand on French 10-year debt over German Bunds jumped 34 basis points in the week the 2027 budget was published and widened by another 5 basis points to 145.5 on Monday morning. By 09:53 UTC the euro had recovered to $1.1205, still 0.37% down on the day.

How the euro and French assets traded on Monday

The euro's fall against sterling is what marks the move as a French problem. A drop against the dollar can simply reflect dollar strength, but EUR/GBP has no dollar in it, and the 0.41% decline there was the euro's worst day against the pound in nearly three months. US data was pulling the dollar the other way: after September payrolls rose by only 29,000 and unemployment reached 4.2%, traders priced a 78% chance that the Fed holds rates in October, up from 36% a week earlier.

What France's 2027 budget asks of bond investors

The budget presented on Thursday, October 1 targets a deficit of 5.0% of GDP in 2027, down from the 5.4% expected for 2026, through about €54 billion of savings, €43 billion of which are new measures such as capped pension indexation and a freeze on the public-sector pay index. Without those measures the deficit would run above 6.5% of GDP. Public debt still rises from about 119% of GDP to above 120% on a growth assumption of 1%, and France's fiscal watchdog, the High Council of Public Finances, called the forecast optimistic on the day it was published.

Prime Minister Sébastien Lecornu runs a minority government, parliament has 70 days to debate the bill, and the government needs it passed by mid-December. Pushing it through without a vote under Article 49.3 of the constitution would expose the government to a no-confidence motion, so bond investors are pricing a budget that may not survive in its current form.

Why a wider French spread pulls the euro down

The 10-year spread is the price of French fiscal and political risk inside the euro area. Investors who still want euro government bonds can switch from French paper to German Bunds without touching the currency, but foreign holders who leave French debt and want no other euro asset have to sell euros on the way out. French 10-year yields reached 4.96% on Friday, October 2, the highest since July 2002, and French five-year credit default swaps traded around 87 basis points, the highest since early 2013.

The spread also changes what the European Central Bank is likely to do. The ECB raised its deposit rate to 2.50% on September 10, its second increase of 2026, and higher euro-area rates have been one of the currency's supports this year. Speaking in Frankfurt on Monday, ECB chief economist Philip Lane described rising long-term rates as a material tightening of financial conditions and said weaker demand from higher energy costs can limit how far the ECB needs to adjust policy. Reuters reported the speech as a sign the energy shock may limit the need for further ECB action, which erodes part of the yield support the euro had been earning.

Why the low came at the Asian open

France made no new budget announcement over the weekend. The euro's low came in thin Asian trading before European markets opened, as Friday's widening in the spread carried into the new week, and the currency recovered part of the loss once European desks were trading. Parliament's debate on the bill, which the government needs finished by mid-December, is the next scheduled test for the spread.