The euro plunged to its lowest level against the dollar in 17 months on Monday amid growing concerns about France's high debt and deficits and political future, which have sent its government bond yields higher.
An underwhelming 2027 budget plan unveiled last week fanned concerns that government spending will remain high ahead of next year's presidential elections, in which the far-right Marine Le Pen, seen as a fiscal populist, stands a chance of winning.
That has rattled bond investors at a time when interest rates – and hence borrowing costs – are rising in developed economies worldwide to combat inflation.
French debt is projected to rise to nearly 122% of the country's gross domestic product (GDP) next year, despite billions of euros in planned spending cuts.
That has sent its 10-year government bond yield to 4.8%, the highest since the 2011 eurozone bond crisis.
"The fact that French bonds and the euro sold off last week, and the downward momentum could persist this week, is a sign that Europe is out of favor with investors and bond market vigilantes are watching developments in the eurozone closely," said Kathleen Brooks, research director at XTB.
A call for snap elections in Spain by Prime Minister Pedro Sanchez also surprised investors, after lawmakers rejected a hotly debated housing relief bill from his Socialist-led minority government.
"France had already been under pressure due to questions over fiscal credibility and political stability," said Patrick Munnelly, market strategist at Tickmill Group.
"Spain now adds another layer of uncertainty," he added. "Europe's political risk is weighing on the euro."
Stocks, meanwhile, were broadly higher, with the Nasdaq opening higher after hitting another all-time high on Friday in the wake of weak U.S. jobs data, and the broader Dow also still near record territory.
That tempered expectations of an imminent rate hike by the Federal Reserve (Fed), and fueled optimism on Asian and European equity markets that the AI-fuelled rally still has room to run.
Paris was dragged lower, however, by Schneider Electric after the industry group unveiled a $22.6 billion all-cash deal to buy the U.S. engineering software specialist PTC, which pulled its share price down nearly 10%.
Lower oil prices provided additional support, after G-7 countries, in coordination with the International Energy Agency (IEA), agreed on Friday to immediately release 100 million barrels of diesel and crude oil to ease supply concerns caused by the U.S.-Iran war.
Exports of Middle East oil, excluding Iran, surpassed their pre-war levels last week despite attacks on ships in the Strait of Hormuz, according to data from the maritime tracking firm Kpler.
But Saudi Aramco chief executive Amin Nasser on Monday described oil stockpiles as "scarily thin" as the European winter looms.
