French debt fears pull the euro to its weakest against the dollar since May 2025

The French presidential election is next year, but investors are selling the euro over France's debt costs now ^[5]. What they are watching is the budget. Sebastien Lecornu's minority government announced a €54bn savings drive last month, and the Guardian reported that it set the stage for a fierce political battle ^[10]. The plan cuts pensions spending and funding for government departments outside defence, while strikes and protests put Emmanuel Macron's administration under pressure ^[11]. Lecornu said the savings would bring the deficit down from 5.5% of GDP this year to 5% next year. Without action, he warned, it could reach 6.5% ^[12]. His target and his warning are 1.5 percentage points of GDP apart ^[22]. Investors fear political pressure could derail the plan ^[13]. They also worry that a hung parliament, with Marine Le Pen's National Rally gaining ground, will make the deficit harder to curtail ^[9].

A skeptic would say this is a war trade with France's name attached. The record supports part of that. The French yield peak came during a global sell-off in government debt, as the Iran war rattled markets ^[18]. Against that, the spread over Germany and the Cac's underperformance both point at Paris ^[8][6]. The Guardian's report does not split the euro's decline between the war and France.

Spain's snap election adds a second political risk inside the bloc ^[1]. "France is the epicentre of the concerns; however, Spain is also set to get ready for an early election, which is adding to investor worries," said Kathleen Brooks, research director at XTB ^[2]. Roberto Mialich, a currency strategist at UniCredit, said "growing political tensions across the eurozone (primarily in France and Spain) and fears of contagion across the European sovereign debt market are putting pressure on the euro" ^[16]. Madrid's Ibex 35 still rose 0.5% on Monday ^[17].

Take a company that sells in euros and reports in dollars. Each million euros of its sales now converts to about $80,000 less than at January's peak ^[23]. "Investors still do not rule out riding a further decline of the euro, making a retest of $1.10 possible in the near term," Mialich said ^[15]. That level is about 1.8% below $1.12 and about 8.3% below the January high ^[20][21].

For a treasurer this quarter, the trade-off is between fixing a known rate and keeping the chance of a recovery if the budget fight eases. Cover taken near $1.12 locks in the fall to date ^[3]. Leaving the exposure open keeps the upside, along with the risk that $1.10 arrives first ^[15]. A eurozone importer paying dollar invoices is exposed the same way. A US buyer of euro-priced goods gains from the fall. The European Central Bank is another unknown. The Guardian reported concerns over the test it faces from war-driven inflation pressure and from the risk that France's debt problem spreads across the euro area ^[14].

In my view this evidence supports revisiting hedge ratios and euro price lists this quarter. It does not yet show that the whole move is French. Whatever rate this quarter's decision fixes will show up in next quarter's reported numbers.