The euro fell to its weakest levels against the US dollar since May 2025 and the British pound since June 2025 this week, as rising energy costs, concerns over France’s public finances and renewed strength in the US dollar outweighed two interest rate increases by the European Central Bank (ECB) this year.
The single European currency dropped to around $1.111 on Wednesday, its lowest level against the dollar since mid-May 2025. It recovered slightly to approximately $1.121 in early trading on Thursday. The euro also fell to around £0.842 against the pound on Wednesday, its weakest level since early June 2025, before edging up to about £0.846 the following morning.
The latest losses have erased much of the euro’s recovery over the summer. Against the dollar, the currency has fallen by more than 5% since late August. Its decline against the pound has reached roughly 2% since late September, wiping out gains made since mid-July.
The euro’s weakness reflects several pressures on the European economy and financial markets. Higher energy prices have increased concerns about inflation, while uncertainty over France’s ability to control its public debt has made investors more cautious about European assets. At the same time, the US dollar has strengthened as markets reassess the outlook for American interest rates.
The dollar index, which measures the US currency against a basket of major currencies, reached an 18-month high on Wednesday after US inflation rose to 3.7% in September, exceeding forecasts. The stronger-than-expected figure has encouraged traders to reconsider the possibility of another Federal Reserve rate increase.
The data roughly doubled market expectations that the US central bank would raise interest rates at its meeting on 28 October. The Federal Reserve’s benchmark rate currently stands at 3.75% to 4%, compared with the ECB’s deposit rate of 2.5%. Expectations of higher US rates can support the dollar by making dollar-denominated investments more attractive to investors.
The euro’s decline also highlights the limits of interest rate increases as a way to support a currency. The ECB raised its deposit rate by a quarter of a percentage point to 2.5% on 10 September, marking its second increase this year. The move was intended to help contain inflation driven by the energy shock linked to the war in Iran.
Europe’s reliance on imported energy leaves the region particularly exposed to rising oil prices. Higher fuel and energy costs can increase the cost of living and business operations, while making it harder for the ECB to control inflation without further tightening monetary policy.
Eurozone inflation has since climbed to 3.8%, its highest level in three years. Traders expect the ECB to leave interest rates unchanged at its 29 October meeting, although markets are pricing in the possibility of another increase in December.
Belgian central bank governor Pierre Wunsch suggested that further tightening may be necessary. Speaking to Bloomberg on Wednesday, he said, “We are probably going to have to hike again.”
Bundesbank president Joachim Nagel has taken a more cautious position. Earlier this month, he said there were “so far no clear signs that inflation has fed through to price and wage setting.” His comments point to an important question facing policymakers: whether rising energy prices will lead to broader and more persistent increases in wages and consumer prices.
The outlook for British interest rates has also helped the pound hold its ground against the euro. Stronger-than-expected UK economic data has increased expectations that the Bank of England could raise rates in November. Those expectations have provided additional support for sterling as investors compare the likely direction of monetary policy in the UK and the eurozone.
Alongside energy prices and interest rate expectations, France’s worsening public finances have become a major source of concern for investors.
The additional yield investors demand to hold French 10-year government bonds instead of German equivalents rose above 150 basis points earlier this month. The spread is closely watched as a measure of perceived risk in the eurozone bond market. Its increase to a level not seen since the European sovereign debt crisis around 2011 reflects growing unease about France’s fiscal position.
France’s government is seeking to make approximately EUR 54 billion in savings through its proposed 2027 budget. The plan aims to reduce the country’s budget deficit to 5% of economic output, down from an expected 5.4% this year. However, the proposal faces a difficult parliamentary debate in a divided legislature, with discussions beginning on Tuesday amid student protests calling for additional public funding for education.
The scale of France’s debt adds to the challenge. According to France’s national statistics agency, INSEE, public debt reached a record 119% of gross domestic product at the end of June 2026. The figure represents approximately EUR 3.59 trillion, almost twice the European Union’s reference threshold of 60% of GDP.
Investors are concerned not only about the size of the debt but also about whether the government can secure enough political support to reduce the deficit. Uncertainty over spending cuts, tax measures and the country’s broader fiscal direction can push up borrowing costs and put additional pressure on European financial markets.
ECB president Christine Lagarde has made clear that France must take the lead in addressing its budget problems rather than relying on the central bank for a solution. Speaking on Wednesday on the sidelines of the annual meetings of the International Monetary Fund and the World Bank Group in Bangkok, she said, “The primary and first solution lies at home in France […] and it has to do with fiscal policies.”
Political uncertainty elsewhere in Europe is adding to investor caution. Spain is due to hold a snap election on 29 November after Prime Minister Pedro Sanchez called an early vote following the defeat of housing decrees. The election adds another source of uncertainty at a time when markets are already sensitive to questions about government stability and public finances across the region.
The euro’s next moves will depend partly on whether incoming economic data changes expectations for interest rates on either side of the Atlantic. Investors are awaiting final eurozone inflation figures on Friday, followed by the Federal Reserve’s decision on 28 October and the ECB’s announcement a day later.
For the euro, the challenge is that higher interest rates alone may not be enough to reverse the decline. Persistent energy costs, concerns about France’s debt and a dollar supported by expectations of tighter US monetary policy are all working against the currency. The direction of interest rates remains important, but investors are also weighing the wider economic and political risks facing Europe.
