The common currency of the 21 EU member states continues to depreciate against the US dollar amid mounting financial and political uncertainty in the bloc.
Concerns have reignited in the eurozone over fears of a repeat of the 2012 debt crisis, driven by France’s deepening fiscal indiscipline, political crisis and ongoing street protests, alongside Spain’s snap elections and Italy’s debt vulnerability.
The Middle East crisis continues to drive up energy costs, adding to volatility in the global bond market, while persistent inflation has cemented the downward pressure on the euro’s value as a medium-term trend.
The euro/US dollar exchange rate has been on a gradual downward trend since testing its January high of 1.21. The exchange rate dropped to 1.11 amid ongoing developments, hitting its lowest level since May 2025.
The euro has depreciated by around 5% this year, and the currency has now come under the spotlight as a sign of persistent fragility in the financial world despite having been largely unaffected by bond market volatility in recent months.
Developments in France, the second-largest economy in the eurozone, have been driving the euro’s depreciation.
France’s 10-year bond yield hit its highest level since 2002, nearing 5% amid geopolitical risks and leading to global bond sell-offs.
France’s overall public budget deficit widened to 5.8% of gross domestic product (GDP), exceeding the EU’s 3% threshold, according to the French National Institute of Statistics and Economic Studies (INSEE) and Paris.
The country has failed to post a budget surplus since 1974, while nominal growth rates have dropped below borrowing rates, dragging the country further into structural debt.
France’s total nominal debt stock hit a historic €3.6 trillion ($4 trillion), accounting for 119% of GDP and exceeding the 60% Maastricht criterion.
The spread between French and German borrowing costs reached its widest level since the major debt crisis of 2012.
Meanwhile, uncertainty in the eurozone has not been limited to France, as the crisis in Spain has also contributed.
Spain’s housing market policies brought political risks to the EU’s fourth-largest economy after Prime Minister Pedro Sanchez decided to call snap elections in November.
The US, on the other hand, is not facing global repercussions despite its historic debt burden exceeding $40 trillion and its inability to maintain spending discipline due to upcoming midterm elections.
Global capital continues to flock to the US dollar as a safe haven amid tensions in the Middle East.
Analysts say movements in the exchange rate stem directly from the euro’s weakness caused by developments in France, while the fragmented structure of national financial markets in the eurozone leaves the region vulnerable to such shocks despite sharing a common currency.
The European Central Bank’s (ECB) room for monetary policy maneuver is being limited by the financial and political turmoil.
The bank had been expected to hike rates three times next year, but these expectations have shifted to two 25-basis-point rate hikes due to the economic slowdown in the region and debt risks, alongside the loss of confidence and the widening interest rate gap between the US and Europe.
Selling pressure on the euro is expected to persist as long as structural problems remain unresolved and political tensions continue, analysts say.
While analysts think a new debt crisis is not inevitable and that France will not be driven into bankruptcy, they believe the euro is highly unlikely to strengthen against the US dollar under current conditions.
Carsten Brzeski, chief economist at ING Germany, recently said the deepening political turmoil in France reflects structural problems threatening the economic stability of the bloc. He noted that the country had already changed prime ministers six times since 2020 and urged the European Commission and the ECB to take action against Paris, as the government had managed to bring the budget deficit below the 3% goal only twice in the past two decades.
He added that political instability and uncertainty would take a toll on the economy and push France toward stagnation.
Chris Turner, head of global markets research at ING, said the euro/US dollar exchange rate would continue to be capped within the 1.10-1.15 range over the next two quarters due to the Fed’s hawkish stance and rising bond yields.
He added that further losses in the euro could be prevented by a fiscal consolidation program adopted by the French parliament, while the White House’s strategies after the midterm elections would determine the exchange rate’s direction.