Below $1.12 in early trade

In early Monday trading the euro lost as much as 0.8% against the dollar and broke below $1.12, a level last seen in May 2025, before regaining some ground. That is the single currency's lowest point against the dollar in 17 months. The move has gathered pace this month: the euro is down about 1.2%, hastening a fall of roughly eight cents from a January peak of $1.20.

French equities bucked the trend elsewhere in Europe on Monday:

• •The Cac 40, France's blue-chip index of leading company shares, lost 1% while markets across the rest of the continent rallied.
• •The FTSE 100 rose 0.2%.
• •Germany's Dax was little changed.

French borrowing costs near two-decade highs

Investors said the sell-off was fuelled by concern over France's rising debt costs as the government works to rein in stretched public finances ahead of next year's presidential election. Last week the yield on French 10-year government bonds hit its highest level since 2002, amid a global sell-off in sovereign debt as the Iran war rattled markets, before dipping back on Friday.

The gap between French and German borrowing costs, an important measure of investor concern, widened to its largest since 2012, when the eurozone sovereign debt crisis was at its height. Investors fear political pressures could derail fiscal consolidation, pushing up borrowing and adding to France's debt pile at a time of soaring government borrowing costs.

Paris's €54bn savings drive

A €54bn (£45.8bn) savings drive to curb borrowing levels, announced last month by the minority government of French prime minister Sébastien Lecornu, has set up a fierce political battle. The cuts fall on pensions spending and funding for government departments, defence excluded, and land as President Emmanuel Macron's centrist administration faces strikes and protests across the country.

The plan's deficit targets and warning:

• •Lecornu said the savings would cap the budget deficit at 5% of GDP next year, down from 5.5% this year.
• •Without action, he warned, the shortfall between public spending and revenue could reach 6.5%.

Investors are watching whether next year's presidential election and a hung parliament, with Marine Le Pen's far-right National Rally party gaining ground, could make it tougher for the government to curtail the budget deficit.

Spain's snap election adds to the pressure

A snap election announced on Monday by Spain's socialist prime minister, Pedro Sánchez, after rightwing parties torpedoed emergency housing legislation last week, has added to eurozone uncertainty. Madrid's benchmark Ibex 35 index rose 0.5%. Kathleen Brooks, research director at XTB, said Europe is taking the spotlight at the start of the week as fiscal and political concerns hit the bloc.

Brooks added that the early vote in Spain is adding to investor worries.

The stress in France's bond market could spill into other countries in the euro area, analysts have warned, stoking fears of a return to the dynamics of the 2010s sovereign debt crisis. Attention is also on the European Central Bank, which faces a test from mounting inflationary pressures linked to the war in the Middle East, alongside the risk that France's debt problem spreads throughout the euro area.

Roberto Mialich, a currency strategist at UniCredit, said growing political tensions across the eurozone, primarily in France and Spain, and fears of contagion across the European sovereign debt market are putting pressure on the euro. Investors, he added, still do not rule out a further decline of the currency, which could see it retest $1.10 in the near term.