The euro recorded four straight weekly losses, dropping to $1.116 against the dollar—its weakest level since May 2025. The decline reflects a fundamental disconnect: Eurozone inflation hit 3.8 percent in September, up from 3.2 percent in August and the highest since September 2023, yet markets are pricing fewer ECB rate hikes, not more.
Two simultaneous shocks explain the reversal. First, an energy crisis is reshaping Europe's economic calculus. The Strait of Hormuz has been largely blocked since the Iran conflict began in late February, cutting off liquefied natural gas shipments. The Dutch TTF benchmark, Europe's gas price indicator, reached €73 per megawatt-hour this week—a 120 percent increase year-over-year. Brent crude traded near $100 a barrel Tuesday, up more than 60 percent since the start of the year. European gas reserves stand at 71.5 percent full as of early October, down from 82.6 percent a year earlier, with winter weeks away.
Energy prices alone drove 18.8 percent year-over-year inflation in the Eurozone. Yet the traditional inflation-to-rate-hike-to-currency-strength chain has broken.
ECB President Christine Lagarde last week signaled the central bank will hesitate to tighten aggressively. She cited evidence that rising borrowing costs are already slowing economic growth and noted no sign of energy prices feeding into wage expectations. Markets responded by slashing rate-hike expectations. At end-September, traders priced in roughly three and a half more ECB hikes; that figure has since fallen to approximately two and a half.
Enrique Díaz-Alvarez, chief economist at Ebury, said the September inflation surprise "did nothing to help the common currency" following Lagarde's remarks, adding that the bar for an October rate increase from the Governing Council is "very high indeed."
The euro now bears the cost of high inflation without the offsetting benefit of higher yields. A weaker euro amplifies the energy shock on purchasing power by raising the price of dollar-denominated imports for European households and businesses.
France's fiscal position compounds the pressure. The spread between France's and Germany's 10-year borrowing costs widened above 1 percentage point last Friday—the first time in years—signaling investor anxiety about French sovereign credit. Ken Egan, head of European sovereign credit at KBRA, attributed the shift to elevated fiscal uncertainty and political risk. He cited persistently weak growth, a fragmented bond market, and political uncertainty in Spain and France as additional vulnerabilities unique to Europe.
