The euro has tumbled to its lowest levels in months against both the US dollar and the British pound, as an energy-driven inflation spike, a bond market revolt over French public finances, and a resurgent dollar outweigh the European Central Bank's (ECB) recent rate increases.
On Wednesday, the single currency traded at roughly $1.111, its weakest since mid-May 2025, before recovering slightly to around $1.121 on Thursday. Against sterling, it hit approximately £0.842, the lowest since early June 2025, and edged back to £0.846 the following day. Since late August, the euro has lost more than 5% against the dollar, erasing the gains made during the summer. Against the pound, it has fallen about 2% since late September, reversing the appreciation seen since mid-July.
Rate hikes fail to shield the euro
The ECB has raised its deposit rate twice this year, most recently by a quarter point to 2.5% on 10 September, in an effort to counter the inflationary impact of the Iran war, which has driven up energy prices. The eurozone imports most of its energy, leaving it more exposed to the oil price spike than the United States. Eurozone inflation has since climbed to 3.8%, a three-year high.
Despite these hikes, the currency remains under pressure. A key factor is the strengthening dollar: the US dollar index hit an 18-month high on Wednesday after US inflation rose to 3.7% in September, above forecasts. That data roughly doubled traders' expectations that the Federal Reserve will raise rates on 28 October, with its benchmark rate already at 3.75-4%—well above the ECB's 2.5%.
Investors are now betting that the ECB will hold rates on 29 October before raising again in December. Belgian central bank governor Pierre Wunsch told Bloomberg on Wednesday, "We are probably going to have to hike again." Bundesbank president Joachim Nagel struck a more patient tone, saying earlier this month that "there are so far no clear signs that inflation has fed through to price and wage setting."
In the UK, robust economic data has fueled expectations that the Bank of England will also raise rates in November, supporting the pound. The UK economy's resilience has added to the pound's appeal.
French debt crisis rattles markets
The extra yield investors demand to hold French rather than German 10-year debt—a key gauge of market nerves—rose above 150 basis points earlier this month, the highest since the euro debt crisis around 2011. France's public debt reached a record 119% of GDP at the end of June 2026, according to INSEE data, amounting to roughly €3.59 trillion and double the EU's official 60% threshold.
The French government's 2027 budget, which aims to save some €54 billion and narrow the deficit to 5% of economic output from an expected 5.4% this year, faces a rocky path through a divided parliament. Debate began on Tuesday amid student protests demanding additional public funding for education.
ECB President Christine Lagarde has dampened hopes of central bank intervention. "The primary and first solution lies at home in France [...] and it has to do with fiscal policies," she stated on Wednesday on the sidelines of the IMF and World Bank Group annual meeting in Bangkok.
Political uncertainty is also spreading elsewhere. Spain heads to a snap election on 29 November, adding to the turmoil rattling European markets. Meanwhile, the broader European political landscape remains tense, with Germany leading a revolt of net payers against the EU budget compromise, and Belgian unions rallying against austerity in Brussels.
The euro's slide underscores the challenges facing the ECB as it navigates a delicate balance between curbing inflation and supporting growth. With energy costs likely to remain elevated and fiscal crises unresolved, the currency's outlook remains uncertain.
