The euro fell below $1.12 to a 17-month low and has declined more than 4% this year as rising French borrowing costs intensified concerns that fiscal and political stress could spread across the euro area. France is seeking to enact an unpopular 2027 budget to reduce its deficit and contain debt approaching 120% of gross domestic product, but the effort faces a divided parliament ahead of next year’s presidential election. Investors have sold French government bonds and bought German Bunds, pushing the French-German 10-year yield spread to its highest level since the 2010-2012 eurozone debt crisis. The Italian-German spread reached almost 130 basis points, its biggest weekly rise since the COVID-19 crisis. Bank of America strategists estimate that each additional 10-basis-point widening in the French spread could be associated with a 0.4% fall in euro-dollar, while options positioning has turned increasingly bearish. The euro also weakened against sterling, the Swiss franc and the yen, falling almost 4% against the yen in September. The European Central Bank’s Transmission Protection Instrument provides a potential backstop for disorderly market tightening, though it has not been used. Policymakers must balance rising inflation linked to energy costs and a weaker currency against higher borrowing costs, weak economic growth and the risk of further sovereign-market stress.