France's widening borrowing costs are spilling into currency markets, pushing the euro to its lowest level in seventeen months. UBS chief executive Sergio Ermotti says the country needs drastic fiscal action, while traders position for further euro weakness against the dollar and other safe havens.
The euro hit a 17-month low below $1.12 against the dollar on Monday and also fell against sterling, the Swiss franc and the yen. The slide tracks a sharp rise in French government bond yields that has started spilling into the broader euro area.
OAT-Bund spread widens sharply
France's benchmark 10-year bond yield stood at 4.7689% Tuesday afternoon after easing nine basis points, leaving French borrowing costs higher than in Greece and Italy. Mitch Reznick, head of cross-border credit at Federated Hermes, said French debt is increasingly being priced more like peripheral than core European debt. Investors are abandoning French bonds for German Bunds, he said, magnifying the spread between the two.
The OAT-Bund spread has moved above 140 basis points, reflecting concern over France's debt load, budget deficits, rising bond supply and political uncertainty ahead of next year's presidential election. Reznick added the European Central Bank remains unlikely to intervene for now, though its tone could shift if spreads keep widening. BofA FX strategists estimate that every 10 basis points of further widening in the French spread against Germany tracks a 0.4% fall in euro/dollar.
Ermotti calls for 'hard measures'
Speaking to CNBC on Tuesday, Ermotti compared the turmoil to the eurozone's 2011 sovereign debt crisis, warning that France's larger economy could make its problems harder to fix this time. He pointed to Spain, Italy, Greece and Portugal, which went through similar crises in the past 10 to 15 years and are now among Europe's best performers.
Asked whether that meant austerity, Ermotti said incremental changes would not resolve the debt pile. Goldman Sachs analysts said: "Spreads do not matter for the currency until they are the only thing that matters."
Traders brace for a weaker euro
Positioning data from the CFTC show traders betting on further euro declines, a view echoed in currency options. Three-month euro risk reversals fell Friday to their most bearish level since 2024. Analysts said the euro could test $1.10. The currency already fell almost 4% against the yen in September.
Far-right candidate Marine Le Pen pledged spending cuts on Tuesday, warning France ultimately risks defaulting on its debt. Stephen Jen of Eurizon SLJ Asset Management said euro/dollar could trade lower still if fiscal contagion in Europe isn't contained, even though the pair was already slightly undervalued.
Sources: CNBC, Investing.com
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