The euro is struggling near a 17-month low as concerns over fiscal sustainability and political uncertainty spread across the eurozone. EUR/USD fell to $1.1161 in the previous session before recovering modestly, extending a decline that has increasingly reflected concerns about European sovereign debt alongside renewed dollar strength.

French Fiscal Pressure Moves to the Forefront

France has emerged as the central source of concern for currency and bond markets. The eurozone’s second-largest economy is facing persistent pressure to reduce its budget deficit while political divisions make fiscal consolidation more difficult. France is targeting a reduction in its deficit to 5% of GDP in 2027, but investors remain uncertain about the government’s ability to secure sufficient political support for the measures required.

The bond market has provided a clear signal of that uncertainty. The spread between French 10-year government bonds and German Bunds widened to around 150 basis points last week, the highest level since the eurozone sovereign debt crisis in 2011, before narrowing somewhat. French 10-year yields also approached 5%, increasing the cost of government financing and raising concerns about the potential transmission of fiscal stress across the region.

Political Uncertainty Broadens Across Europe

France is no longer the only political risk facing the euro. Spain has added another source of uncertainty after Prime Minister Pedro Sánchez called a snap general election for November 29 following the rejection of government housing measures. Although Spanish financial markets initially showed a more limited reaction than France, the development reinforces concerns that political fragmentation is becoming a broader eurozone issue.

For currency markets, the significance extends beyond individual elections. Investors are assessing whether governments across major eurozone economies can maintain credible fiscal policies while managing elevated debt levels and higher borrowing costs. If sovereign spreads continue widening, the euro could face additional pressure through tighter financial conditions and increased risk premiums.

Dollar Strength Adds to the Euro’s Challenges

The euro’s weakness is also occurring alongside renewed strength in the U.S. dollar. The dollar index has reached an 18-month high as higher U.S. Treasury yields support demand for dollar-denominated assets. The divergence is notable because softer U.S. employment data has reduced expectations for an immediate Federal Reserve rate increase, yet the dollar has continued to benefit from relative yield and market-positioning dynamics.

The euro has now recorded four consecutive weekly declines, while its losses against sterling and the Swiss franc underline that the pressure is not limited to the dollar exchange rate. The market is increasingly focused on whether European policymakers can contain sovereign borrowing costs without creating a difficult trade-off between financial stability and inflation control.

The next phase will depend heavily on developments in France’s budget process, Spanish politics and the direction of European bond spreads. A stabilization in French yields could help the euro regain some ground, while further deterioration in sovereign markets would raise the risk of broader contagion. Investors will also monitor ECB communication, European inflation and U.S. Treasury yields as key indicators of whether the currency’s decline is beginning to stabilize or has further room to run.