Euro near 17-month low as French central bank chief warns on interest rates

The euro remained under pressure on Monday, trading near a 17-month low against the dollar at $1.1206, down 0.13%. The single currency extended a 1.2% fall from last week and is more than 4% weaker this year. Investors are worried that France’s high debt burden could threaten the stability of the wider eurozone.

Emmanuel Moulin, governor of the Banque de France, told the Financial Times, as reported by The Guardian, that France risks being “strangled by interest rates” if it does not tackle its deficit. He said France was not in the same position as Greece during the eurozone crisis. Moulin said that passing a budget this year to cut spending and narrow the deficit, as the government has proposed, would reassure markets through concrete fiscal consolidation. He added that inaction could leave the country gradually squeezed by rising borrowing costs.

The French government is trying to control stretched public finances before next year’s presidential election, with teachers, students, nurses and civil servants protesting against budget cuts. A sell-off in French bonds that drove yields higher last week eased on Monday. The spread between French and safer German 10-year borrowing costs widened before tightening again, according to The Guardian.

Mohit Kumar, chief European economist at Jefferies, said French bond spreads had tightened over the last two sessions, dropping from an intraday high above 150 basis points to 136 basis points. He said he did not think the situation amounted to a sovereign crisis. Kumar warned that spreads above 150 basis points could create contagion risks for other French issuers and European peripherals. He also said deficit concerns should worry investors more than near-term inflation, with markets targeting the weakest links in the deficit picture, France and the UK.

Asian stock markets rose after a technology rally lifted the Nasdaq to a record close on Wall Street. The move was supported by weaker-than-expected US jobs growth, which dampened expectations of an interest-rate hike by the Federal Reserve this month, while oil prices retreated. US 10-year and 30-year Treasury bond yields hit fresh 24-year highs overnight. Nvidia gained 2.1% to a record closing high, giving it a market value of $5.76tn, while MSCI’s broadest Asia-Pacific index excluding Japan climbed 1.2% and Japan’s Nikkei added 1.1%.

Later in the day, investors will watch the eurozone S&P Global construction survey for September, the UK construction PMI, eurozone retail sales for August, US ADP employment weekly data and US trade figures for August. The UK chancellor is also due to meet bank bosses, and the Financial Conduct Authority holds its annual meeting in Edinburgh.