Euro trades near 17-month low as French central bank warns of 'strangling' risk

Banque de France governor says France ‘not Greece’ but urges budget action

The euro remained under pressure on Monday, trading near a 17-month low against the dollar as the governor of the Banque de France warned the country could be “strangled by interest rates” if it failed to rein in its deficit. The single currency was down 0.13% to $1.1206, extending a 1.2% drop from last week and a decline of more than 4% this year, as investors weighed the prospect of further pressure on French sovereign debt.

In an interview with the Financial Times, Banque de France Governor Emmanuel Moulin said France “is not Greece during the eurozone crisis” but cautioned that the risk of being “gradually strangled by rising interest rates” was real without action. “We have to remain masters of our own destiny,” Moulin said. He added that if France “can pass a budget this year to reduce spending and narrow the deficit as the government has proposed, then markets will be reassured by this concrete step of fiscal consolidation.”

Moulin’s warning comes as the French government battles to control its stretched public finances in the run-up to next year’s presidential election. Teachers, students, nurses and civil servants have taken to the streets to protest against budget cuts, complicating the government’s effort to narrow the deficit.

French bonds sold off last week, sending yields higher, though the sell-off eased on Monday. The interest rate that France pays to borrow over safer German debt on benchmark 10-year bonds, called the spread, widened before tightening again.

Mohit Kumar, chief European economist at Jefferies, said French spreads had “tightened in the last two sessions, falling from an intraday high of over 150 basis points to 136bp currently.” Kumar said: “We don’t think that we are in a sovereign crisis.”

But Kumar cautioned that further widening could spread beyond France. “Our fear is that as spreads move above 150bp, we could see some contagion risks not just to other French names, but also onto European peripherals,” he said. “We have highlighted a number of times that deficit concerns should be a greater risk for investors than near term inflation,” Kumar said. He added that “market is going after the weakest link in the deficit picture which is France and the UK.”

Beyond the immediate focus on French debt, broader market moves reflected shifting expectations for US monetary policy. Weaker-than-expected US jobs growth has dampened expectations of an interest rate hike from the Federal Reserve this month, helping lift Asian stock markets. MSCI’s broadest index of Asia-Pacific shares excluding Japan climbed 1.2%, while Japan’s Nikkei added 1.1%.

On Wall Street, the Nasdaq closed at a record, lifted by technology stocks. AI chipmaker Nvidia gained 2.1% to a record closing high, pushing its market value to $5.76tn.

US 10-year and 30-year Treasury bond yields hit fresh 24-year highs overnight, even as expectations of a Federal Reserve interest rate hike this month receded. Oil prices retreated.

Scheduled for later on Monday: the eurozone S&P Global Construction survey for September at 8.30am BST, the UK S&P Global Construction PMI for September at 9.30am BST, eurozone retail sales for August at 10am BST, the Financial Conduct Authority’s annual meeting in Edinburgh at 11am BST, US ADP employment change weekly data at 1.15pm BST, and US trade figures for August at 1.30pm BST. The UK chancellor is scheduled to meet with bank bosses.