Euro tumbles to fresh lows versus dollar and pound as energy, French debt fears and a strong US currency outweigh ECB hikes

Market Analysis

The euro slid on Wednesday to its weakest levels against both the US dollar and the British pound not seen since mid-May and early June 2025 respectively, as a confluence of higher energy costs, worries over French sovereign debt and a resurgent US dollar outweighed two interest-rate increases from the European Central Bank (ECB).

The single currency traded at roughly $1.111 on Wednesday a low last seen in mid-May 2025 before recovering slightly to about $1.121 in early trading on Thursday. Since late August the euro has fallen more than 5%, erasing the recovery it staged over the summer. Against the pound it dipped to around £0.842 on Wednesday, the weakest since early June 2025, and was near £0.846 on Thursday, leaving it about 2% lower since late September.

The decline reflects two linked forces: weakness in the euro itself and renewed strength in the US dollar. The US dollar index, which tracks the greenback against major currencies, hit an 18-month high on Wednesday after US inflation unexpectedly rose to 3.7% in September above forecasts rekindling expectations that the Federal Reserve will raise interest rates at its 28 October policy meeting. The Feds benchmark rate already stands at 3.75-4%, well above the ECBs current deposit rate of 2.5%.

Why rate hikes havent helped the euro

The ECB raised its deposit rate by a quarter percentage point to 2.5% on 10 September its second hike this year aiming to blunt an energy-driven inflation spike after the Iran war lifted oil and fuel costs. Eurozone inflation has climbed to 3.8%, a three-year high, and traders expect the ECB to hold rates on 29 October before lifting them again in December. Belgian central bank governor Pierre Wunsch told Bloomberg this week that we are probably going to have to hike again, though Bundesbank president Joachim Nagel has urged caution, saying there are not yet clear signs inflation has fed through into wages and prices.

Despite the ECBs moves, interest-rate differentials favour the dollar, leaving the euro vulnerable. Strong UK economic data has also nudged market expectations that the Bank of England could raise rates in November, providing additional support to the pound.

Frances debt worries and political noise

A separate pressure point for the euro has been a fresh bout of anxiety about French public finances. The yield premium investors demand to hold French 10-year bonds instead of German Bunds a common gauge of market nerves climbed above 150 basis points earlier this month, the widest spread since the euro-area debt crisis around 2011. Frances public debt reached a record 119% of GDP at the end of June 2026, roughly €3.59 trillion, according to INSEE.

The French governments 2027 budget proposal aims to save about €54 billion and trim the deficit to around 5% of GDP from an expected 5.4% this year, but it faces a fraught passage through a divided parliament. Debate began amid student protests demanding more education funding, and ECB President Christine Lagarde has repeatedly said that fiscal fixes must come from national policies, telling delegates at the IMF and World Bank annual meetings in Bangkok that the primary and first solution lies at home in France.

Political uncertainty elsewhere in the region is adding to market jitters. Spain heads to a snap election on 29 November, a development markets view as another source of volatility across European assets.

Looking ahead, investors will focus on final eurozone inflation figures due on Friday, before a packed policy calendar that includes the Federal Reserve decision on 28 October and the ECB meeting on 29 October. Those announcements should provide clearer direction for the euro after a week in which external shocks and sovereign risk overshadowed central-bank tightening.