European political and fiscal risks heighten concerns; the euro falls to a 17-month low.

The euro fell to its lowest level since May 2025 as investors' concerns over political and fiscal risks in Europe intensified. During Asian trading hours, the euro dropped as much as 0.8% to $1.1161 per euro. On Friday, the premium investors demanded to hold French government bonds over German bunds of the same maturity rose to a level not seen since 2011. Reports that Spanish government officials are preparing for early elections further exacerbated the turmoil in the French bond market. Meanwhile, hedge fund selling became a prominent feature of the market. According to traders who declined to be named, Asian fast-money funds sold the euro and bought the dollar in spot trading. They said this pushed the euro's exchange rate down to levels that triggered additional options-related selling. Homin Lee, senior macro strategist at Lombard Odier Singapore Ltd., said: "The bond and FX markets are clearly signaling that investors are uneasy about the French government's growing instability and the weakening of the country's fiscal anchoring capacity ahead of the 2027 election." Investors are increasingly worried about France's political situation. As next year's election approaches, opposition parties appear to have little willingness to compromise with the outgoing government of French President Emmanuel Macron. According to a poll released last week, far-right candidate Marine Le Pen and her far-left rival Jean-Luc Melenchon are expected to advance to a second-round runoff. JPMorgan strategists including Meera Chandan previously noted that the euro had not yet reflected changes in the French bond market and said the euro remained vulnerable to further selling, especially against the Swiss franc and the yen. "The euro has yet to reflect the impact of widening OAT yields and related tail risks," they said. "EUR/CHF is too high and may continue to adjust lower." In addition, a stronger dollar also weighed on the euro. The market expects the Federal Reserve may need to raise interest rates three more times by July next year to curb inflation. The dollar spot index rose on Monday to its highest level since the end of June. Fiona Lim, senior FX strategist at Malayan Banking Berhad, said: "The dollar appears to have digested Friday's weak jobs report, with market focus shifting to the euro area after French credit default swap (CDS) spreads widened sharply last week." "This has raised market attention to the fiscal health of other highly indebted peripheral economies in the euro area, further supporting the dollar's strength."