Euro at 17-month low amid Spain, France and rate jitters

The euro dropped to a 17-month trough versus the US dollar on Monday. Concerns that Spain's government could call a snap election added to existing fears about France's fiscal situation.

Elevated borrowing costs impose another strain, dampening European equity offerings after a robust beginning to 2026.

Spain's troubles add to market anxiety alongside France

The euro fell by as much as 0.8% in Asian trading, reaching $1.1161, Bloomberg reported. It then edged back to $1.1179, putting it 4.86% lower for the year.

Three sources close to Prime Minister Pedro Sánchez informed Bloomberg that senior officials now favor an early ballot. Cabinet members and Socialist party leaders see it as the optimal reaction to last week's significant parliamentary defeat.

According to traders, hedge funds based in Asia sold euros for dollars on the spot market. That selling drove the currency through option barriers, prolonging the slide. Such barriers are levels at which particular options activate or deactivate, compelling dealers to modify their hedges.

Spain's difficulties add to the challenges of an unstable government and pressure on public finances in France. The spread between French and German borrowing costs hit 152 basis points on Friday, the most 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.

Interest rate hikes cool Europe's dealmaking boom

Political factors are only one source of pressure on European markets; borrowing costs have also increased throughout the region. In September, the European Central Bank raised its deposit rate to 2.50% due to energy-driven inflation.

The expectation of additional rate hikes is now darkening the prospects for equity offerings. Third-quarter volumes fell about 20% compared with a year ago, according to Bloomberg data.

That decline came after a first half where European stock sales totalled $89 billion, a 36% increase year-over-year. The picture for IPOs is more uncertain. European companies that went public in the past year have dropped 17% on average.

Stock prices have fared better than deal activity; the Stoxx Europe 600 hit records during the summer. Goldman Sachs noted in August that the index has outperformed the S&P 500 since early 2025.

The Stoxx 600 ended Friday at 631.35, roughly 5% off its August intraday peak of 663.41. According to JPMorgan's Ashish Jhajharia, the apparent stability masks investor anxiety.

“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 upcoming earnings season will show whether company profits can continue to counterbalance elevated interest rates.