FX.co ★ The Dollar Collects Tribute From Europe

The euro hasn't felt this lost in a long time. The currency investors once considered the EU's safe haven fell to a low not seen since May 2025, losing 2.5% in September — its worst month in a year. France's budget crisis and expectations of another Federal Reserve monetary tightening are pulling EUR/USD down from both sides.

Societe Generale calls euro selling one of the favorite ways to play the dollar's renewed strength. The French government published its 2027 budget, and the document ignited political debate that could cost the prime minister his job. The country plans a record bond issuance to cover the deficit and repay old debt.

Dynamics of France's budget deficit

Authorities proposed reducing the deficit by €43 billion through spending cuts and higher tax receipts, bringing it to 5% of GDP in 2027. Pensions, social benefits and public-sector wages are in the firing line, although more than a third of the amount comes from higher budget revenues rather than savings. The finance minister believes that if the 5% target is achieved, the country could still reach a long-term 3% target by 2029, but that depends on the next president.

Political risks are a negative factor for the euro. Investors are tense ahead of the French presidential election, since the opposition has no intention of striking deals with Emmanuel Macron. On the forwards market, bets against the euro are rising not only for the coming weeks but into mid-2027, reflecting expectations of turbulence for EUR/USD across the electoral cycle.

Dynamics of reversal risks for the euro

The yield premium on French 10-year bonds over German bunds jumped to 134 bps, the highest since 2012. Rising global government bond yields also pressured EUR/USD, as oil surged above $100 amid the Middle Eastern conflict. The 10-year Treasury yield rose to levels not seen since 2002, and the Bloomberg government-bond index posted its worst quarter since 2024.

A bullish factor for the US dollar is the expectation of one more Fed tightening act before year-end. Donald Trump said Fed Chair Kevin Warsh should have voted against the federal funds rate hike but did not blame him for not doing so. The decision was unanimous despite White House pressure to lower borrowing costs.

An unfavorable factor for the euro remains the European Central Bank's stance. Christine Lagarde believes the bond-yield rally should restrain economic growth and slow inflation, and that adds pressure on the currency. Societe Generale expects geopolitical risks to keep hitting the euro, feeding stagflationary sentiment in the eurozone.

Are investors still willing to pay a premium for uncertainty in France?

Technically, on the daily chart, EUR/USD has already hit the first of the two previously identified short targets at 1.13 and 1.12. Retracements should be used to sell.