Euro Weakens as France’s Fiscal and Political Risks Rise

Hedge funds and other currency traders are positioning for further euro weakness as concerns about France’s public finances and political stability increase.

The euro fell as much as 0.7% against the dollar to $1.1176 on Wednesday. It dropped 0.4% against sterling to 84.48 pence, its lowest level since June 2025, and approached a one-year low against the yen. Earlier in the week, it reached a 17-month low against the dollar.

France has become a focus for investors. Rising government bond yields have drawn attention to the country’s fiscal position, while renewed political uncertainty has added pressure on the euro. Jane Foley, a strategist at Rabobank, said the prospect of further political disruption before France’s presidential election had increased uncertainty.

A selloff in European government bonds last week revived concerns about debt risks across the region. Spain’s call for snap elections added to political uncertainty for currency traders.

Currency traders familiar with the transactions said hedge funds were using euro crosses to bet against the common currency. They favoured the Swiss franc and yen, followed by sterling and the dollar. The approach limits exposure to euro-specific risks while reducing exposure to uncertainty around the dollar and US fiscal policy.

Morgan Stanley strategists led by David Adams recommended selling the euro against the Australian dollar and Swiss franc. They cited European fiscal and political risks and the possibility that the European Central Bank could adopt a more accommodative policy if bond-market volatility persists.

Markets have reduced expectations for further ECB interest-rate increases. Interest-rate swaps now price the equivalent of three quarter-point increases by September 2027, down from four at the start of last week.

Options markets show a similar shift. The cost of hedging euro-yen movements has risen more than 100 basis points above the cost of hedging dollar-yen movements, the widest gap since March 2025. One-month euro-sterling risk reversals have shifted in favour of sterling for the first time since August 2024.