Why Is the Euro at a 17-Month Low? Spain and France Are Only Half the Story

The euro slid to a 17-month low against the dollar on Monday. Reports that Spain’s government may call an early election deepened worries already building over France’s budget.

Higher interest rates add a second strain, slowing European share sales after a strong start to 2026.

Madrid Joins Paris on the Market’s Worry List

According to Bloomberg, the euro lost as much as 0.8% during Asian hours, touching $1.1161. It later recovered slightly to $1.1179, leaving it down 4.86% for the year.

Three people close to Prime Minister Pedro Sánchez told Bloomberg that senior officials now back an early ballot. Cabinet ministers and Socialist party leaders see it as the best response to last week’s heavy defeat in parliament.

Traders said that Asia-based hedge funds sold euros for dollars in the spot market. That selling pushed the currency through option barriers, which extended the decline. These are levels where certain options switch on or off, forcing dealers to adjust their hedges.

Madrid’s troubles come on top of a shaky government and strained public finances in France. On Friday, the gap between French and German borrowing costs reached 152 basis points, its widest since 2011.

“Bond and currency markets are clearly signaling investor discomfort about the rising instability of the French government and erosion in the country’s fiscal anchor ahead of the elections in 2027,” Homin Lee, senior macro strategist at Lombard Odier Singapore, said.

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Rates Take the Shine Off Europe’s Deal Boom

Politics explains only part of the strain on European markets, as borrowing costs have also climbed across the region. The European Central Bank (ECB) raised its deposit rate to 2.50% in September amid energy-driven inflation. 

The prospect of further increases is now clouding the outlook for share sales. Third-quarter volume already dropped roughly 20% from a year earlier, Bloomberg data show.

That drop followed a first half in which European stock sales reached $89 billion, up 36% year-on-year. The outlook for initial public offerings (IPOs) is less clear. European listings from the past year have lost 17% on average.

Share prices have held up better than deal flow, with the Stoxx Europe 600 setting records over the summer. In August, Goldman Sachs said the index had outpaced the S&P 500 since early 2025.

The index closed Friday at 631.35, about 5% below its August intraday high of 663.41. JPMorgan’s Ashish Jhajharia said that steadiness hides investor unease.

“While headline indices are near all-time highs and VIX is fairly benign, there are clearly concerns underneath the surface around things like rates, inflation, geopolitics,” he stated.

The coming earnings season will show whether corporate profits can keep offsetting higher rates.

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