Euro drops toward 17-month lows, dollar holds gains after Fed minutes

By Chuck Mikolajczak

NEW YORK, Oct 7 (Reuters) - The euro tumbled on Wednesday as French bonds came under renewed pressure on fiscal concerns, while the dollar held gains following the minutes from the most recent Federal Reserve meeting.

Yields on French and Italian debt rose, with those of more indebted countries spiking more sharply than those of safe havens such as Germany as French fiscal worries dragged on and oil prices came back into focus.

The French 10-year yield surged 11.9 basis points​​, on track for its biggest daily jump in two weeks, to 4.8696% while the German 10-year bond yield was unchanged at 3.4805%.

"The case in Europe is that for a while they've operated a bit in a welfare-state type mode, spending a lot of money, not really bringing in a lot of revenue, and it's finally biting them. Considering also the fact that everybody has had to spend more money on energy, the outlook is not good," said Juan Perez, senior director of trading at Monex USA in Washington.

"The focus is on Europe, and it's a very, very negative one."

The euro slumped 0.53% to $1.1198, closing in on the 17-month lows hit on Monday.

GREENBACK GAINS AHEAD OF FED MINUTES

The dollar index, which measures the greenback against a basket of currencies, was last up 0.32% to 102.24, briefly paring gains before recovering in the wake of the Fed minutes.

The minutes showed policymakers were divided last month over the rationale for raising interest rates, with "some participants" seeing a hike as needed to keep the impact of energy and other price shocks at bay, but a more hawkish core viewing it as necessary to guard against emerging demand-driven inflation.

Recent comments from many Fed policymakers have been supportive of more rate hikes, although Federal Reserve Bank of New York President John Williams and Vice Chair Philip Jefferson last week expressed a preference for patience in additional rate increases.

The greenback was also supported as energy prices remain elevated, although oil prices relinquished earlier gains in choppy trading after the International Energy Agency agreed to speed up a release of oil stocks and prioritize diesel in an effort to combat record high fuel prices.

"We already kind of understand the dynamic that in a time when it's difficult to access energy resources, the US dollar is going to spike," said Perez.

The chance of a rate hike of at least 25 basis points at the Fed's meeting later this month stands at 19.4%, from about 38% a week ago, according to CME FedWatch, but markets are pricing in an 83% chance of a hike at the Fed's December meeting.

FRENCH DEBT UNDER PRESSURE

Bond yields around the world have climbed in recent weeks due to expectations of central bank rate hikes as well as concerns about government finances. French debt is under growing pressure as politicians struggle to curb the budget deficit ahead of a divisive election in 2027. The calling of a snap election in Spain added to the pressure on the euro.

France's economic situation is serious, given the rise in its borrowing costs, but the country does not at this point need help from the European Central Bank, Bank of France head Emmanuel Moulin said.

France will be "strategic" in its approach to issuing new debt, French Finance Minister Roland Lescure told the Wall Street Journal in an interview.

"OATs (French bonds) do have room to sell off further, but I don't necessarily mean that it's going to be a panic. That's because France isn't yet hinting that it's close to default, so it's not yet getting to the point where we were having these conversations about Greece during the sovereign debt crisis," said Shriya Samarth, head of EMEA rates at StoneX.

Sterling weakened 0.42% to $1.3216 against the greenback but hit its highest level since June 2025 against the euro.

Against the Japanese yen, the dollar weakened 0.09% to 157.95. The Bank of Japan's new policymaker, Ayano Sato, said in an interview with the Kyodo news agency that she supports the idea of raising interest rates in several stages.

(Reporting by Chuck Mikolajczak; additional reporting by Medha Singh, Rocky Swift and Harry Robertson; Editing by Mark Potter, Nick Zieminski and Andrea Ricci )