Euro falls to 1.116 dollars amid energy crunch and French budget crisis
- La monnaie unique a chuté jusqu'à 1,116 dollar, son niveau le plus faible face au dollar depuis mai 2025, après avoir enchaîné quatre semaines de baisse.
- Behind the decline are two simultaneous pressures constraining the currency zone.
- These supply pressures translated directly into consumer prices.
La monnaie unique a chuté jusqu’à 1,116 dollar, son niveau le plus faible face au dollar depuis mai 2025, après avoir enchaîné quatre semaines de baisse. Investors are now shorting the currency on an unprecedented scale, driven by a severe European energy crunch and an unresolved French budget crisis that has widened sovereign borrowing spreads.
Behind the decline are two simultaneous pressures constraining the currency zone. A disruption of liquefied natural gas cargoes through the Strait of Ormuz that began at the end of February. European gas storage levels stood at 71.5 percent on October 2, down from 82.6 percent a year prior. Brent crude traded near 100 dollars per barrel on Tuesday, registering a gain of more than 60 percent since the start of the year.
These supply pressures translated directly into consumer prices. Eurostat data shows eurozone inflation jumped to 3.8 percent in September, up from 3.2 percent in August, driven by an 18.8 percent year-on-year increase in energy costs alone.
Strait Disruptions and Gas Deficits
Energy imports into Europe face acute constraints following disruptions of liquefied natural gas shipments through the Strait of Ormuz. The Dutch TTF benchmark gas price was around 73 euros per megawatt-hour this week, up about 120 percent from a year earlier.
Policy Constraints at the European Central Bank
European Central Bank President Christine Lagarde dampened rate-hike expectations last week, pointing out that higher borrowing costs are already slowing the economy without evidence of energy price pressures feeding into wages. Enrique Díaz-Alvarez, chief economist at Ebury, stated that the September inflation surprise did not help the common currency, particularly after remarks from Lagarde.
The ECB faces a policy dilemma between tightening monetary settings to fight inflation and pausing to protect vulnerable sovereign debt markets. Ana Munera, at BBVA, described the central bank’s choice as a clear dichotomy between further tightening and maintaining stability at the periphery.
French Budget Instability Increases Investor Risk Premiums
Political instability in France has compounded the currency’s difficulties. The 2027 budget lacks a parliamentary majority. Emmanuel Moulin, governor of the Banque de France, warned Tuesday that the nation risks being strangled by interest rates if it fails to address its public finances.
Record Speculative Short Positions
Market sentiment is reflected clearly in futures data from the US Commodity Futures Trading Commission. During the week ending September 29, speculative traders held 301,439 short contracts on the euro, representing roughly 38 billion euros. Their net short position stood at 63,256 contracts, marking the most negative positioning recorded since April 2025.
Francesco Pesole, foreign exchange strategist at ING, observed that the fiscal risk premium remains relatively contained, which leaves room for the EUR/USD exchange rate to slide toward 1.110 or 1.100 if bond market strains intensify. Danske Bank indicated that the downward trend could persist.
Danske Bank said that the EUR/USD had reached its 12-month target of 1.12 sooner than expected, but it expects the downtrend to continue into 2027.