The euro fell to a 17-month low and the dollar index touched 102 as European debt took the brunt of Thursday's selling. French yields eased after a smooth auction and a budget with about $50 billion of spending cuts.
Europe's bond markets had a harder morning than America's, and the currency showed it.
The yield on Britain's 30-year gilt rose as high as 6.07% in morning trading, above 6% for the first time since 1998. The 10-year gilt traded near 5.40%. The pressure lands weeks before the chancellor presents a budget later this month.
In France, the 10-year yield climbed to about 4.96%. The gap between French and German 10-year yields, a gauge of stress in the euro area, widened to about 1.33 percentage points, its widest since May 2012. Italian and Greek debt sold off as well, while German Bunds rallied later in the day as investors moved toward the region's safest paper.
Stocks followed the bonds. Bank shares dragged the CAC 40 in Paris down 1.6%. Italy's FTSE MIB dropped 2.2% to its lowest in about three and a half months. The pan-European Stoxx 600 lost 1.3% and London's FTSE 100 fell 1.7%.
Paris pares the damage
French yields came off their highs during the session, with the 10-year easing to about 4.82%. A government bond auction drew solid demand. Paris published its 2027 budget the same day. It cuts spending by nearly $50 billion and aims for a deficit equal to 5% of output.
"The problem is that there is a buyers strike," said Mohit Kumar, chief European economist at Jefferies, before the turnaround.
The Japanese hedge
Part of the strain traces to Tokyo. French government bonds are Japan's largest holding of European debt, and with the Bank of Japan raising rates, home-market yields now compete. Strategists at TS Lombard calculate that after the cost of a one-year currency hedge, a 4.8% French 10-year yield delivers about 3.3% to a yen-based investor. Japan's own 10-year bond yields about 3.10%.
That leaves a hedged pickup of roughly 0.2 percentage point for taking French political and fiscal risk instead of holding Japanese government bonds, against a hedging cost of about 1.5 points.
The euro and the dollar
The euro fell about 0.9% to near $1.123, its lowest since May 2025. That is the reverse of the usual relationship, in which rising yields draw buyers to a currency. The dollar index, in which the euro carries almost 58% of the weight, touched 102 for the first time since April 2025.
Alex Kuptsikevich, chief market analyst at FxPro, said sticky inflation in the euro area is working against the currency rather than for it, since the central bank "will have to stand by and watch for some time."
European officials were discussing a release of diesel stockpiles, a step that could ease inflation pressure and trim bets on further European Central Bank rate increases.
Two readings
One reading is that a fiscal-risk premium is opening up in Europe. Spreads are widening country by country, French debt issuance is set at a record, and the euro is falling with its bonds rather than rallying on higher yields.
A second reading is that Europe is absorbing the same global shock as the U.S., the combination of higher energy costs and long-duration selling. On that view, peripheral spreads are simply moving more than the core, as they usually do, and the euro is falling on the gap between U.S. and European growth.
Dates ahead
Friday's flash estimate of euro-area inflation is the first marker, followed by the British budget later in October. The French-German spread is the number that tells the two readings apart. If it narrows back toward 1.2 points while Bund yields stay high, Thursday was a global move. If it holds above 1.3 as Bunds rally, the premium is about France.