Europe’s single currency fell on Wednesday to lows against the US dollar not seen since mid-May last year, and against the British pound since early June last year, as soaring energy costs, a bond market revolt over French public finances and a stronger US dollar weigh on it.
The slide comes even though the European Central Bank (ECB) has raised interest rates twice this year, which would normally support a currency.
The euro traded at roughly $1.111 on Wednesday, its weakest since mid-May 2025 and below the low it first hit earlier this month, before rebounding slightly to around $1.121 in early trading on Thursday.
It is down more than 5% since late August, completely reversing the recovery it staged over the summer.
Against the British pound, it hit roughly £0.842 on Wednesday, the lowest since early June 2025, and edged back to around £0.846 on Thursday. That leaves it down roughly 2% since late September, wiping out the gains it had made since mid-July.
An exchange rate has two sides, so the euro’s slide also reflects a stronger US dollar.
The US dollar index, which tracks it against major currencies, hit an 18-month high on Wednesday after US inflation rose to 3.7% in September, above forecasts.
Rate hikes offer no shield
The US inflation data roughly doubled traders’ bets that the Federal Reserve will raise rates on 28 October. Its benchmark rate already stands at 3.75-4%, well above the ECB’s current 2.5%.
The ECB raised its deposit rate by a quarter point to 2.5% on 10 September, its second hike this year, to counter the energy shock from the Iran war as Europe imports most of its energy, leaving it more exposed to the oil price spike than the US.
Eurozone inflation has since climbed to 3.8%, a three-year high.
Traders are currently betting the ECB will keep rates on hold on 29 October before raising them again in December.
"We are probably going to have to hike again," Belgian central bank governor Pierre Wunsch told Bloomberg on Wednesday.
Bundesbank president Joachim Nagel struck a more patient tone, saying earlier this month that "there are so far no clear signs that inflation has fed through to price and wage setting."
In the UK, robust economic data has fuelled bets that the Bank of England will also raise rates in November, supporting the British pound.
French debt crisis
The extra yield investors demand to hold French rather than German 10-year debt, a gauge of nerves, rose above 150 basis points earlier this month, the most since the euro debt crisis around 2011.
The French government’s 2027 budget, which aims to save some €54 billion and narrow the deficit to 5% of economic output from an expected 5.4% this year, faces a rocky ride through a divided parliament, where debate began on Tuesday amid student protests revindicating additional public funding for the education system.
France's public debt reached a record 119% of GDP at the end of June 2026, according to INSEE data. This represents about €3.59 trillion and is double the official EU threshold for public debt-to-GDP which is 60%.
ECB President Christine Lagarde has dampened hopes of the central bank helping.
"The primary and first solution lies at home in France [...] and it has to do with fiscal policies," Lagarde stated on Wednesday on the sidelines of the annual meeting of the IMF and the World Bank Group in Bangkok.
Spain, meanwhile, heads to a snap election on 29 November, adding to the political turmoil that is rattling European markets.
Investors will next look to final eurozone inflation figures on Friday, followed by interest rate decisions from the Federal Reserve on 28 October and the ECB a day later.