The euro fell today to its lowest level against the dollar since May 2025, as investors grew nervous about politics and budgets in the eurozone. It dropped 0.8% to $1.1161 during Asian trading hours.

Most of the pressure is coming from France, where bond prices are already falling, and from Spain, where the government is reportedly preparing for an early election. A stronger dollar is adding to the squeeze: markets expect the Federal Reserve to raise interest rates three more times by July to curb inflation.

The euro also lost ground against other major currencies. It slipped about 0.5% against the Swiss franc, a third straight day of declines, and fell 0.26% against the British pound to £0.850.

Currency dealers who spoke on condition of anonymity said hedge funds and Asian funds running short-term strategies are driving most of the euro selling in the spot market. The drop has also triggered extra selling linked to options.

On Friday, the gap between French and German bond yields widened by the most since 2011. Spreads on French credit default swaps, which insure investors against default, also jumped sharply last week.

"Bond and currency markets are clearly signaling investors' unease about the growing instability of the French government," said Homin Lee, a senior macro strategist at Lombard Odier Singapore. He said markets are also worried about the erosion of France's fiscal stability ahead of the 2027 election.

France's opposition shows no sign of wanting to compromise with the government ahead of next year's election. A poll released last week found that far-right leader Marine Le Pen and far-left leader Jean-Luc Mélenchon would reach the second round.

JPMorgan strategists, including Meera Chandan, warned on Friday that the euro has not yet fully priced in the stress in the French debt market and remains vulnerable to further sell-offs, especially against the Swiss franc and the yen. They said the euro's rate against the franc is too high and could fall further.

Bloomberg's dollar spot index, which tracks the US currency's strength, hit its highest level today since late June. A weaker US jobs report last Friday has not weighed on the dollar, said Fiona Lim, a senior currency strategist at Malayan Banking Berhad.

Markets are once again focused on the eurozone, Lim said. The tension around France has also drawn attention to the public finances of other heavily indebted economies on the eurozone's periphery, she said, which has helped support the dollar.