Euro sinks to 17-month low as French fiscal woes spur contagion fears

By Ankur Banerjee

SINGAPORE, Oct 5 (Reuters) - The euro slid sharply on Monday to a 17-month low as fiscal worries in France in the wake of a steep bond market rout stoked contagion fears in the region, helping the dollar shrug off soft US jobs data that dented near-term rate hike expectations.

The euro sank to as low as $1.1161 in Asian hours, its weakest level since May 2025, after four straight weekly declines, weighed down by France's debt levels and concerns about political gridlock ahead of next year's election.

The single currency was last down 0.68% at $1.1176, while weakening 0.5% against the Swiss franc and sliding 0.39% against sterling.

"Don't stand in front of the train," said Chris Weston, head of research at Pepperstone, warning against betting on a quick rebound.

He said the move was a continuation of recent fiscal issues, with "possibly a whiff of contagion creeping in."

Brent Donnelly, president of foreign exchange trading at analytics firm Spectra Markets, said the French politics trade that many expected would escalate this winter as April 2027 elections neared is here now.

"It's not completely obvious what might fix things here as any budget promises made by the French government now are not super credible with a change of power coming soon," he said.

The bond market ruction and the euro's weakness spurred concerns that France's troubles could spread across the euro zone similar to the debt crisis more than a decade ago and force the European Central Bank to help shore up French debt.

Some analysts though said it was still too early to judge whether there was growing risk of contagion.

Ninghui Liu, head of investment strategy and research for APAC at State Street Investment Management, said France's fiscal position was becoming increasingly unstable but noted that the market had only been reacting since last week.

"For now, I think it's more of a country story rather than the euro crisis," he added.

Should the strain deepen, other euro zone members would not stand aside, Liu said. "Germany definitely will step in, because they are the ones who want to make sure that the EU can still hold."

BOND ROUT HANGOVER

Markets are also still reeling from the recent bond rout, which drove global borrowing costs to multi-decade highs and pummelled French debt as investors fretted over inflation risks from soaring oil prices.

French bond futures dipped 0.22%, close to record lows they have been hugging in recent days, while German Bund futures rose 0.1%, highlighting the divergence in bond markets as investors seek shelter in relatively safer debt.

The premium of French 10-year borrowing costs over Germany's ended last week at 140 basis points, after gaining 34 bps, its biggest weekly jump in 17 years, according to LSEG data..

The yield on US 10-year Treasury notes was 1.6 bps lower at 5.260%, as some calm returned following a spike to a 24-year high last week that rattled markets.

Sterling slipped 0.25% to $1.3205, while the Japanese yen changed hands at 157.92 per dollar. That left the dollar index, which measures the US currency against six major units, up 0.47% at 102.37.

"The dollar is the main winner in the current environment as not only is the rise in Treasury yields boosting the appeal of US assets, but the broad selloff in debt globally is fuelling safe-haven flows into the greenback," said Matthew Ryan, head of market strategy at Ebury.

Apart from the euro's troubles, much of the dollar strength in recent weeks has come from traders pricing in Fed rate hikes in the coming months. However, data on Friday showed US job growth slowed more than expected in September, denting those expectations.

Traders are now pricing in a 78% chance of the US central bank holding rates steady in October, compared with 36% a week earlier, the CME FedWatch tool showed. They still expect a hike in December and another two in the first half of 2027.

(Reporting by Ankur Banerjee and Tom Westbrook in Singapore; Editing by Kevin Buckland and Kim Coghill)