The euro fell to a more-than 16-month low against the dollar on Monday as concerns about France's fiscal position grew and as Spain announced a snap election.

Worries about increased French government spending owing to political pressure have helped widen the spread between French and German government bond yields to multiyear highs.

Meanwhile, Spain's Prime Minister Pedro Sanchez sparked fresh political uncertainty after calling for an early election to be held next month following protests over the country's housing crisis.

The euro was down 0.4% to $1.1205 in early afternoon trade in Europe, having touched $1.1160 earlier, its lowest level since May 16, 2025, according to LSEG. Against sterling, the euro also fell to an 11-week low of 0.8456 pounds.

"The increase in volatility for European sovereign spreads has weighed on the euro, and we continue to view the euro as an attractive funding currency in part reflecting this capacity for political risk premium to increase," Morgan Stanley strategists said in a note.

Yields on 10-year French government bonds remained elevated Monday after reaching their highest since 2002 on Friday, Tradeweb data showed. It followed news that France's public debt reached 119% of the country's gross domestic product and was projected to swell toward 122%, Maybank analysts said in a research report.

"What [is] most worrying is its plans to borrow a record 340 billion euros in 2027 to help finance its spending and for debt repayment," the analysts said. "There are signs of contagion as the yields of other debt-laden peripheral eurozone economies surged higher as seen for Greece and Italy," the analysts added.

Spanish 10-year yields also remained high after rising to the highest levels since December 2013 on Friday.

Adding further pressure on the euro, financial markets have trimmed expectations for interest-rate increases by the European Central Bank.

"ECB policymakers are contending with a renewed tightening in Eurozone financial conditions stemming from turbulence in the French sovereign bond market," said Lee Sue Ann of UOB's Global Economics & Markets Research in a research report.

"As such, we continue to expect the ECB to pause in October and deliver one final 25-basis-point hike in December, with tighter financial conditions reducing the urgency for an immediate policy response despite higher-than-expected inflation," the economist said.