The euro steadied on Tuesday after falling sharply in the previous session, as investors monitored developments in French bond markets and assessed whether financial stress could spread across the broader euro zone.

The common currency traded less than 0.1% lower at around $1.12 after reaching $1.116 on Monday, its lowest level since May 2025. The decline extended the euro’s weekly losses to more than 1%, reflecting growing concern over France’s fiscal position and political uncertainty.

The stabilization in European bond markets provided some relief, but the broader pressure on the currency remained.

French Debt Concerns Remain a Major Risk

French government bond yields fell by almost 0.1 percentage points on Tuesday as oil prices eased slightly, helping reduce immediate concerns about a further acceleration in the country’s debt-market selloff.

Bond yields move inversely to prices, meaning the decline offered some relief following the previous day’s pressure.

However, investors remain concerned about France’s high debt levels and political gridlock. An upcoming snap election in Spain is also adding another source of uncertainty to the euro-zone outlook.

The euro’s weakness has therefore become another indicator of the market’s concern about fiscal conditions within the region.

Dollar Strength Adds Pressure to the Euro

The U.S. dollar remained firm, supported by rising Treasury yields. The dollar index was little changed at 102.16 after reaching 102.53 in the previous session, its highest level in 18 months.

The greenback has maintained its strength despite declining expectations for an immediate Federal Reserve rate increase following weaker-than-expected U.S. employment data.

Investors continue to anticipate that inflation could keep monetary policy restrictive. The latest U.S. services-sector data showed slower activity in September but also indicated strong domestic demand, supply-chain pressure and rising input costs.

Fed Expectations Remain Divided

Markets are currently pricing only a 22% probability of an October Federal Reserve rate hike, according to the CME FedWatch data cited in the source material. Expectations rise to approximately 85% for a December increase.

That divergence reflects the uncertainty surrounding the Fed’s policy path. Weak employment data has reduced expectations for immediate tightening, while persistent price pressures continue to support the possibility of higher rates later.

For currency markets, the combination of elevated U.S. Treasury yields and uncertainty surrounding the euro zone has continued to favor the dollar.

Yen and Sterling Also in Focus

The dollar rose 0.2% against the yen to 158.21, while sterling was little changed around $1.323.

Attention is also turning toward the Bank of Japan, with sources indicating that policymakers may signal this month that underlying inflation has broadly reached the central bank’s 2% target. Such a signal could reinforce expectations for additional rate increases in the coming months.

The Australian dollar, meanwhile, slipped 0.1% to $0.696.

What Investors Should Watch Next

The euro’s immediate outlook will depend heavily on whether French bond-market pressures continue to ease or develop into a broader concern for European sovereign debt. Stabilizing yields could provide some relief, but persistent fiscal uncertainty remains a significant obstacle for the currency.

At the same time, the dollar’s performance will remain closely tied to U.S. Treasury yields and expectations for Federal Reserve policy. The next inflation, employment and central-bank signals could determine whether markets continue to price a significant possibility of tighter U.S. monetary policy later in the year.