Violent riots across France have sent the euro lower against the US dollar and pushed French borrowing costs towards a 24-year high, intensifying political and economic pressure on President Emmanuel Macron's government.
The currency weakened by 0.14% to around $1.1223 on Monday as investors reacted to some of the country's worst unrest in years. Looting, clashes with police and attacks on public buildings added to fears over France's already fragile finances.
Market reaction to unrest
French shares also tumbled, while government bond yields surged. France's 10-year government bond yield climbed 13 basis points to 4.9%, approaching the 4.99% level reached earlier this month – its highest since 2002.
The gap between French and German borrowing costs widened to 146 basis points, meaning investors are demanding a greater premium to lend to France rather than Germany, which is seen as a safer borrower.
The sell-off came as the country grappled with rising living costs, weak economic growth and mounting public debt, with the government struggling to pass a budget aimed at bringing its finances under control.
Weekend of violence
The turmoil followed a weekend of widespread protests which descended into violence across the country. Limoges town hall was set on fire, while more than 3,000 shops were looted or damaged, according to the government. Around 2,400 people were arrested during the unrest.
The scale of the disorder has intensified pressure on Mr Macron's administration, which was already struggling to secure political agreement over spending cuts and tax measures needed to rein in the deficit.
Prime Minister Sebastien Lecornu has asked some local authorities to impose partial curfews and has not ruled out declaring a state of emergency.
Investor concerns and wider impact
Investors fear the unrest will make the government's efforts to repair the public finances even harder, with political manoeuvring ahead of next year's presidential election adding to uncertainty.
Hank Calenti, global market strategist at SMBC, said: "The fact this is coming after a weekend of protests shows that hopes for reform are in remission."
The financial fallout has also spread beyond France, with investors concerned that higher borrowing costs could put pressure on other heavily indebted eurozone countries. Italy is being watched particularly closely. Its 10-year bond yield rose 11 basis points to 4.58% on Monday, reflecting fears that the crisis could spill over into other vulnerable economies.
Political consequences
The political consequences could be equally serious for Mr Macron, who is due to leave office after a decade in power when the presidential election takes place next year. Marine Le Pen's National Rally is already a major contender to succeed him, and the unrest could strengthen her law-and-order message as voters become increasingly frustrated with the government's handling of the crisis.
Investors are also awaiting France's delayed budget legislation, which is considered crucial to restoring confidence in the country's finances. With the euro weakening, borrowing costs rising and violence exposing the government's difficulties in restoring order, Mr Macron faces a fresh test of his authority at a critical moment for France.
The country's credit outlook could come under further scrutiny this week, with ratings agency Moody's due to review France's credit rating on Friday.
