The euro fell to its weakest level against the U.S. dollar in 17 months on Monday, October 5, 2026, as political upheaval in Spain and France spooked investors and amplified existing concerns about eurozone fiscal health.
According to London Stock Exchange Group data, the euro declined 0.6% and reached $1.1219, marking its lowest level since May 19, 2025. The currency has fallen approximately 5% since the start of 2026 and extended a 1.2% decline from the previous week. The weakness was driven by simultaneous pressures: rising inflation, elevated interest rates, climbing government borrowing costs, and political instability in the eurozone's two largest economies after Germany.
In Spain, Prime Minister Pedro Sánchez called a snap election for November following widespread protests over a housing crisis that blocked his government's reform efforts. Despite Spain's relatively strong economic performance during the eurozone's pandemic recovery, the political turmoil raised questions about the country's ability to maintain fiscal discipline. Rufaro Chiriseri, head of fixed income for RBC Wealth Management, told CNBC that Spanish assets had been among preferred investments this year due to growth and fiscal stability, though he noted the political uncertainty posed a new risk.
France emerged as the primary source of eurozone concern. The country faces a debt-to-GDP ratio near 118% and a budget deficit above 5%, well above the eurozone target. French 10-year government bond yields reached 5% before easing slightly, reflecting surging borrowing costs. Barclays economists said that while France presented a 2027 budget draft aimed at reducing the deficit from 5.4% to 5% of GDP, the country is unlikely to meet those targets. Strategists at ING added that even if the budget passed in full, it would "not resolve France's structural fiscal problems," and that the next government would face difficult choices ahead of the 2027 presidential election. Concerns over potential victory by Marine Le Pen of the far-right National Rally added to investor anxiety.
The spread between German and German 10-year government bond yields reached its widest level since the eurozone debt crisis, signaling financial stress rippling across the bloc. Deutsche Bank strategist Jim Reid noted that the gap had widened to the point of a "mini-panic," though it remained unclear whether this represented the start of a new sovereign debt crisis or market overshooting.
The dollar's strength partly reflected elevated U.S. Treasury yields, which reached multi-decade highs. Joseph Capurso, a strategist at Commonwealth Bank of Australia, predicted the euro could fall below $1.10, stating that euro recovery would require significant oil price declines, expectations for eurozone monetary policy tightening, or progress on budget deficit reduction—prospects he considered unlikely in the near term. Ricardo Amaro, lead eurozone economist at Oxford Economics, said the European Central Bank faced a delicate challenge: taking action to prevent French debt concerns from escalating into panic without sounding so hawkish as to further pressure French bond yields.
The euro's depreciation carried implications for inflation across the eurozone, as a weaker currency typically increases import prices and inflationary pressure at a time when the region was already grappling with elevated price growth.
