Euro plummets against US dollar: has the next crisis begun?

FRANCE, 5 OCTOBER 2026 —

The euro slid to a 17-month low against the US dollar in early trading on Monday, touching $1.12, a level not seen since early 2025. This sharp decline marks a significant deterioration in the currency’s value, which has already fallen approximately 5% since the start of 2026.

The drop was driven by intensifying concerns over eurozone debt, with particular focus on France, compounded by broader investor anxiety regarding global government bond yields and rising oil prices. For markets in Malaysia and across the region, this volatility underscores the fragility of global financial stability and the potential for spillover effects that could impact trade, energy costs, and investment flows.

The immediate catalyst for the sell-off was a renewed focus on the fiscal viability of France, the eurozone’s second-largest economy. Investors have increasingly positioned themselves for higher fiscal risk, leading to a rapid rise in the cost of borrowing for the French state. French 10-year government bonds, which indicate the interest rate France must pay to borrow money over a decade, saw yields spike to 5% before easing slightly.

This surge in yields reflects deepening doubts among market participants about the long-term sustainability of France’s public finances, creating a ripple effect that has pressured the euro and other government bond markets, including those of Italy.

The underlying fiscal challenges in France are not new but have worsened significantly since President Emmanuel Macron took office in May 2017. During this period, public spending has climbed while deep tax cuts were implemented, resulting in a national debt that has increased by well over €1 trillion, or $1.12 trillion. Consequently, France’s debt-to-GDP ratio now stands at almost 118%.

The country consistently posts unbalanced budgets, with its annual budget deficit regularly exceeding 5%, a stark contrast to the 3.4% rate recorded when Macron first assumed power. These structural imbalances have made France a focal point for investors who are retreating to perceived safer assets, such as German government debt, amid wider concerns over low eurozone growth and surging energy prices.

A key indicator of this stress is the widening gap between French and German government debt yields. Last week, the difference between the 10-year yields of the two countries reached its highest level since the eurozone debt crisis of the early 2010s. This spread is a closely watched measure of EU financial stability, and its expansion signals a loss of confidence in the cohesion of the currency bloc.

Deutsche Bank’s Jim Reid noted in a report on Monday that at one point last week, the spread between German and French bonds had become so wide that a "mini-panic" was at hand. Reid posed the critical question facing markets: "The big question is whether this is the start of a new euro sovereign crisis or whether markets have already overshot."

The situation presents a complex challenge for the European Central Bank (ECB), which is under pressure to act to prevent concern over France from turning into outright panic. However, policymakers face a delicate balancing act. Ricardo Amaro, lead eurozone economist at Oxford Economics, explained that the ECB needs to act without exacerbating the problem.

"Sounding too hawkish would also add to pressure on France's bond yields, which became an important driver of euro weakness," Amaro said. He expects policymakers to continue monitoring currency developments between the US dollar and the euro but anticipates that the ECB is likely to stop short of trying to directly influence the market for now.

The general slide in the euro can be attributed to a repricing of investor expectations regarding US Federal Reserve policy, specifically the prospect of higher interest rates in the face of rising global bond yields, according to Amaro.

Political instability in France adds another layer of uncertainty to the economic picture. In recent years, France has been beset by political crises, with the agreement of annual budgets becoming a major test of government stability. Although the 2027 budget has been agreed upon with reforms aimed at reducing the deficit, the right-wing National Rally remains well-placed ahead of the 2027 presidential election, in which Marine Le Pen is likely to be their candidate.

Investors are spooked by concerns over French economic policy in the event of a Le Pen victory, a dynamic similar to how the rise of the populist AfD in Germany has raised questions over the future direction of the bloc's key economy. This political risk premium is further compounded by voter anger over the high cost of living, a sentiment that has also driven political shifts in other parts of Europe.

The broader regional and global implications of a weakening euro are significant, particularly regarding inflation. Amaro warned that sharper euro weakness would reinforce the inflationary shock at a time when inflation is already expected to stay high into 2027. A weaker euro increases the cost of imported goods, particularly those priced in US dollars.

Since global commodities such as oil and gas are priced in dollars, soaring energy prices would likely rise further, as would the cost of US imports. For countries like Malaysia, which rely on imported energy and raw materials, this dynamic could translate into higher input costs for industries and increased pressure on consumer prices, complicating local monetary policy decisions.

Despite the alarming parallels with the past, some analysts argue that the current situation is distinct from the previous crisis. Geoffrey Yu, senior strategist at BNY, stated that such concerns are misplaced. "Comparisons to 2012 are well off the mark," Yu said, suggesting that the structural and policy frameworks in place today are different from those during the peak of the sovereign debt crisis.

However, Amaro countered that the fact that further interest rate hikes are expected from the ECB this year, combined with the worsening inflation outlook, makes this a situation that needs to be managed and monitored very carefully. The interplay between currency weakness, rising yields, and political risk creates a volatile environment that requires precise navigation by central banks.

The political landscape in Europe continues to shift in response to economic pressures. In Spain, Prime Minister Pedro Sánchez has just called a snap election after measures to deal with the country's housing crisis were voted down in parliament. This development highlights how economic distress is translating into political upheaval across the continent. The cost-of-living crisis remains a dominant theme, driving voter anger and influencing electoral outcomes.

For regional observers, the trajectory of European politics is crucial, as policy decisions in the eurozone will have direct implications for global trade patterns, supply chains, and financial markets.

The euro’s decline to $1.12 serves as a stark reminder of the vulnerabilities within the global financial system. While the immediate trigger is French fiscal risk, the underlying causes include global bond yield trends, energy price volatility, and political fragmentation in Europe. The ECB’s response will be closely scrutinized, as any misstep could either stabilize markets or deepen the crisis.

Investors are currently weighing the risks of a new sovereign debt crisis against the possibility that markets have overshot their concerns. The coming weeks will be critical in determining whether the euro can stabilize or if the downward trend will continue, with potential repercussions for global inflation and economic growth.

As the situation evolves, the focus will remain on the spread between French and German bond yields, a key indicator of financial stability within the eurozone. If this spread continues to widen, it could trigger further capital flight from peripheral eurozone countries, putting additional pressure on the currency. The ECB’s ability to manage this situation without triggering a hawkish response that worsens France’s borrowing costs will be the defining factor in the near term.

For now, the market is in a state of heightened uncertainty, with investors carefully monitoring developments in France and the broader eurozone. The interplay between fiscal policy, monetary policy, and political stability will determine the path forward for the euro and the global economy.

Related: Emmanuel Macron · France