France's government bond yield sees its biggest jump in 17 years

On Monday, the yield on France's ten-year government bonds briefly topped 5% a year — the highest level since 2002. Investors see French debt as markedly riskier than German debt, and over the past week the yield gap between the two widened more sharply than at any point in the last 17 years.

Markets fear a domino effect

Traders are increasingly worried that France's troubles could spill over into other eurozone countries, although some analysts still see the problems as mainly a French domestic affair. According to Brent Donnelly of the US financial analysis firm Spectra Markets, many expected the current situation to emerge only closer to winter. “It's not entirely clear what could fix this right now. The budget promises of the current French government aren't very convincing if political power could soon change hands,” Reuters quoted him as saying.

The dollar is the main winner from the jitters

This uncertainty is strengthening the dollar, which investors traditionally regard as a safer asset. Its appeal is further fueled by rising yields on US government bonds, which are also edging toward record levels: the yield on ten-year US Treasuries is holding near 5.26%, below the 24-year high reached last week that rattled financial markets, CNBC notes. “The dollar is the biggest winner right now. Rising yields on US government bonds are boosting the appeal of US assets, while the simultaneous bond sell-off in global markets is pushing investors toward the dollar as a safe haven,” explained Matthew Ryan, chief market strategist at the trading platform Ebury. On Monday the dollar strengthened against a basket of major world currencies by about 0.5%.

The Czech koruna caught between the dollar and the euro

The moves in the dollar and the euro are also showing up in the Czech koruna's exchange rate. Since the start of the year it has weakened by 5% against the dollar and by 1.4% against the euro. The dollar currently trades at around 21.58 koruna, and the euro at around 24.44 koruna. “If the situation around France's public finances keeps deteriorating, it could put additional pressure on the euro. For the koruna, that could actually bring some relief, since its weakening against the euro won't necessarily continue at the same pace,” said Jan Kořínek, an economist at Artesa. He noted that in the coming months the exchange rate will be shaped not only by Czech National Bank policy but also by investor confidence in the European economy and the eurozone's stability. At the same time, the koruna has weakened only slightly against the euro, while its decline against the dollar is far more pronounced. “That shows part of this move isn't really a koruna story at all — it's primarily about the strength of the US dollar,” noted Bohumil Žitný, a strategist at the Czech investment and financial advisory firm Žitný a partneři.

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Around Prague, based on reporting by novinky.cz