French bond stress joins the Fed in pushing the euro toward a 17-month low

Rising bond yields would ordinarily support a currency. The CNA report lists them among the weights on the euro, next to higher oil prices ^[3]. The yields in question are the ones pulling away from Germany's. The report attributes the euro's fall to its lowest since May last year to the widening gap between German bonds and those of more indebted members such as France and Italy ^[5].

Tommy von Brömsen, FX strategist at Handelsbanken, put part of the euro's weakness on Paris. "If you look at euro-dollar, it's not only about dollar strength but euro weakness coming from the political situation in France," he said ^[7]. The same report names a wider force too: the global bond selloff has been the dominant driver of currency markets in recent weeks, and yields rose again on Thursday as oil jumped ^[4].

Thursday's prices allow a rough test of how much of the euro's weakness is French. The spread widened again, and the report describes the euro only as down slightly, without a percentage ^[8]. The dollar rose 0.1% against the yen ^[13], and the Australian and New Zealand dollars each lost 0.1% ^[14], the same size as the dollar index's gain ^[9]. If a French discount were moving the exchange rate day to day, the euro would trail those currencies on a widening day. On Thursday the reported moves are too close to separate. The longer comparison points the same way. The dollar index is near its strongest since April 9, 2025 ^[9], and the euro near its weakest since May last year ^[5], so the dollar's extreme is about a month longer-dated than the euro's, consistent with a move led by the dollar ^[20].

On the Fed, von Brömsen said: "There was no major surprise, but I think they were on the hawkish side" ^[11]. The CNA report says the minutes did little to shift expectations of a hold this month ^[12]. Futures leave roughly a one-in-five chance of a move on October 28 ^[18]. Across Wednesday and Thursday the dollar index gained about 0.4% ^[19].

If the spread keeps widening as next year's election nears and the euro starts to lag the yen and the Australian dollar on those days, the French discount is separate from the Fed and growing. Jim Reid of Deutsche Bank, quoted in an SCMP column, framed the other possibility. "The big question is whether this is the start of a new euro sovereign crisis or whether markets have already overshot," he said ^[17]. An overshoot would show up as the spread narrowing while the euro stays near its low, and the move would then belong to the dollar.

In my view France is already in the euro's level and not yet in its daily moves: the spread and the euro's slide have run together ^[5], while Thursday's dollar gains were the same size across currencies ^[13]. A widening day on which the euro falls clearly further than the yen would prove that wrong.