Concerns about the spread of French government bond risks intensify, making it difficult to stop the euro’s decline

智通财经2026/10/06 03:36

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(1) The euro continues to weaken, becoming the latest warning sign as France's soaring borrowing costs spread to the broader eurozone market. On Monday, the euro fell below 1.12 against the US dollar, hitting a 17-month low, and also dropped significantly against the British pound, Swiss franc, and Japanese yen. (2) The French government is pushing a controversial 2027 budget plan aimed at reducing the fiscal deficit and controlling record debt. However, deep divisions in parliament and parties preparing for next year's presidential election make this goal difficult to achieve. Investors are selling French government bonds and shifting to German bunds for safety. The yield spread between French and German bonds has reached its widest level since the eurozone debt crisis of 2010–2012, raising market concerns about the risk spreading to other eurozone countries. (3) Analysts state that the factors that supported the euro this summer have disappeared. Previous market expectations that the energy shock would be brief and that the US intended to push the dollar lower have faded. According to Bank of America, every 10 basis point widening of the France-Germany spread could lower the euro/dollar by 0.4%; Goldman Sachs says this effect could intensify significantly during periods of severe market stress. (4) Andreas König, Global Head of FX at AXA Investment Managers, noted that the euro/dollar pair is usually more influenced by US news, but Europe is also having an impact this time; he does not expect a turnaround in the medium term and continues to overweight the US dollar. CFTC positions show traders are bearish on the euro, and the three-month euro risk reversal indicator fell last Friday to its most bearish level since 2024. (5) Analysts suggest the euro may test $1.10; Societe Generale's Juckes also highlights the euro's vulnerability to the yen and Swiss franc, noting that the euro has fallen nearly 4% against the yen in September.

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