Euro slides to seven-week lows on German political crisis

The euro extended its slide on Tuesday, falling to fresh seven-week lows below 1.1450 against the US dollar as political turmoil in Germany and mounting fiscal concerns in France weighed on the common currency. The EUR/USD pair broke below its prior low near 1.1454, with the decline accelerating despite a moderate risk-on mood in broader markets fueled by falling oil prices.fxstreet

Merz's Historic Defeat Shakes Confidence

The immediate catalyst was the aftermath of Sunday's state elections in Germany, where Chancellor Friedrich Merz's Christian Democratic Union suffered what The Economist called a "disaster." In Mecklenburg-Western Pomerania, the CDU fell below the 5% threshold needed for parliamentary representation — the first time the party has been shut out of a state legislature in Germany's postwar history. In Berlin, the CDU trailed the Left party, which captured 25.7% of the vote.lemonde+3

Merz canceled a planned trip to the United Nations General Assembly in New York and vowed to press ahead with economic reforms, according to NPR and CNBC. But the scale of the losses has raised questions about his political survival and, more critically for markets, the fate of the Eurozone's proposed EUR 2 trillion budget that includes a major boost to defense spending. The Financial Times, citing German officials involved in negotiations, reported that the weekend's results have forced the EU to reassess what it can achieve in the coming months. The pro-Kremlin Alternative for Germany party's growing strength has added to the uncertainty.tradingview+3

France's Fiscal Woes Compound the Pressure

Adding to the euro's troubles, Scope Ratings downgraded France's sovereign debt to A+ from AA- on September 18, bringing its assessment in line with Fitch and S&P, while Morningstar DBRS moved to a negative outlook, according to Bloomberg. French public debt is projected to reach 119.3% of GDP in 2026 and 121.7% in 2027, according to official estimates from the Ministry of Economy and Finance.pollar+2

Dollar Strength Adds to Euro Headwinds

On the other side of the trade, the US dollar drew support from a sharp rise in Treasury yields. Analysts at MUFG noted that the two-year US Treasury yield had climbed roughly 55 basis points since late August as markets priced in a more extended Federal Reserve rate-hike cycle, with three more increases expected over the coming year. European Central Bank president Christine Lagarde is scheduled to speak Tuesday at a conference organized by the Ukrainian and Polish central banks, where she is expected to maintain a hawkish tone after the ECB's second rate hike of the year.fxstreet