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Investing.com -- The U.S. dollar ticked up on Monday, helped by a slide in the euro to its lowest level in nearly 17 months. The single currency was under pressure amid a government debt crisis in France.

The U.S. dollar index, which tracks the greenback against a basket of six major peers, climbed 0.2% to 102.14, its highest since April 9, 2025.

French fiscal gridlock sparks contagion anxieties

The euro was last down 0.3% to $1.1222, having earlier fallen to as much as $1.1161, its lowest since May 16, 2025.

Foreign exchange market participants in Europe parsed a deepening fiscal shock in France, where mounting public debt loads and severe political gridlock ahead of next year's presidential election have triggered a repricing of sovereign risk premia.

A violent sell-off in French government paper saw two-year yields jump 76 basis points on the day, while the yield spread between 10-year French OATs and benchmark German Bunds blew past 140 basis points - its widest since the Eurozone debt crisis in 2012. With five-year French credit default swaps soaring to 87 basis points, currency desks are actively pricing in broader fiscal contagion across the single-currency bloc.

France last week unveiled its budget bill for 2027, targeting a public deficit of 5% of gross domestic product (GDP) through proposed spending cuts of 54 billion euros ($60.59 billion). However, France has been burdened with severe fiscal issues, with its deficit projected to reach 5.4% of GDP this year and public debt approaching 120% of GDP.

"Europe has moved to the forefront of the challenges facing global bond markets, and its sluggishness has meaningfully strengthened the greenback, as difficult politics that impede fiscal discipline, in conjunction with a regulatory culture that limits economic expansion, make budget balancing almost impossible because revenue and spending differentials continue to widen," José Torres, senior economist at Interactive Brokers, said.

Dollar helped by bond rout even as Fed rate hike bets remain lower

At home, U.S. Treasury yields surged as bonds were dumped. The benchmark 10-year yield rose 2.9 basis points to 5.309%, while the 30-year improved 3 basis points to 5.660%. Both instruments were hovering at multi-decade highs.

Last week, more rate-sensitive shorter-term bonds had felt some relief last week after U.S. economic data led to a dent in expectations of imminent Federal Reserve monetary policy tightening. The latest reading on the central bank's preferred inflation gauge showed a moderation in annual growth, while an unexpectedly weak nonfarm payrolls report hinted at a slight cooling in the labor market.

As per the CME FedWatch tool, the odds of quarter-point rate hike by the Fed later this month fell to around 20% at the end of last week compared to about 70% at the start of the week.

The economic calendar is empty this week, with the minutes of the Fed's last interest rate meeting being the highlight. On Monday, the Institute for Supply Management's September report on the U.S. services sector showed economic activity slowing last month from August, though remaining above expansion territory. Notably, the measure of prices paid by services businesses accelerated in September to the highest reading since July 2022.

"There is a bit of an early month lull in the data calendar this week," analysts at Lloyds Bank said.

"The main focal point will be the final services and composite PMI reports (Mon), which should offer more granular color from across the Eurozone and perhaps include more detail on the effect of the rise in energy during the month, which had little impact on the early estimates," they added.

Roushni Nair and Pranav Kashyap contributed to this article