The euro dropped to $1.12 on Monday as investor anxiety over French debt and broader eurozone economic growth intensified.

The euro reached a 17-month low against the US dollar on Monday, trading at $1.12. The decline follows a broader slide of approximately 5% since the start of 2026, driven by concerns over global bond yields, rising oil prices, and specific fiscal risks associated with France.

French fiscal concerns and market pressure

Investors have increasingly scrutinized France's long-term fiscal viability, leading to a rise in the yield of 10-year French government bonds to 5% last week. France's debt-to-GDP ratio has reached nearly 118%, with annual budget deficits now regularly exceeding 5%. This fiscal pressure has caused the spread between French and German 10-year bond yields to reach its highest level since the eurozone debt crisis. Market participants are also reacting to political instability in France, where passing annual budgets has become a recurring challenge. Investors are expressing concern regarding the potential economic policy direction should the National Rally, led by Marine Le Pen, win the 2027 presidential election.

Economic impact and ECB policy challenges

A weakening euro risks reinforcing inflationary pressures by increasing the cost of imported goods and dollar-denominated commodities like oil and gas. Economists warn that this could exacerbate inflation, which is already expected to remain high into 2027. The European Central Bank (ECB) faces a complex situation in managing these developments. Analysts note that while there is pressure for the ECB to act to prevent market panic, aggressive policy moves could inadvertently increase pressure on French bond yields, further weakening the currency.