U.S. Dollar Inches Up amidst Rise in Treasury Bond Yields
The Eurozone saw a decline in new car registrations in June, with a 7.3% year-on-year drop to 1.010 million units. Meanwhile, the Japanese manufacturing PMI fell to 48.8 in July, while the US counterpart dropped to a 7-month low of 49.5. Despite these economic indicators, the euro has shown resilience against the dollar.
The strength of the euro relative to the dollar in 2025 is primarily influenced by differences in central bank policies, economic outlooks, market risk perceptions, and geopolitical developments.
The European Central Bank (ECB) is expected to modestly cut its policy rates by 25 basis points in September and December 2025, lowering the deposit facility rate to around 1.5%. However, rate hikes are anticipated beginning in 2027, returning rates to 2.0% eventually. In contrast, the US Federal Reserve policy is subject to uncertainty, with market pricing reflecting a higher risk premium on US assets.
Economic outlook and inflation also play a significant role. ECB forecasts indicate expectations of falling deposit rates in the short term but an appreciating euro against the dollar from mid-2025 to 2030. Nominal wages in the Eurozone are also expected to grow, supporting economic strength there.
Market sentiment and global reserve currency shifts are also crucial factors. The euro appreciated roughly 12% against the dollar since the start of 2025, with the EUR/USD rate hitting highs above 1.18 mid-year before a slight correction. The dollar’s share in global reserves declined to 57.7%, while the euro’s share rose to 20.1%, marking its highest since late 2022.
The US dollar has experienced significant weakening due to being historically overvalued in real effective exchange rate (REER) terms, uncertainty due to President Trump’s unpredictable economic policies, and trade tariffs affecting trade relationships. These factors have encouraged other economies like Europe and China to focus on domestic demand, impacting currency flows and the dollar's value.
Technical and market dynamics also favour a stronger euro. Technical analysis shows strong resistance and support levels in EUR/USD around 1.12–1.13 earlier in 2025 and an upward bias overall. Market positioning and forecasts continue to favour a stronger euro through the remainder of 2025.
In summary, the euro’s relative strength against the dollar in 2025 is mainly due to expectations of a more stable or accommodative ECB policy in the near term combined with an uncertain, politically and economically volatile US outlook that has increased risk premia on the dollar. This has led to a substantial euro appreciation and a realignment of reserve currency shares globally. However, long-term forecasts suggest potential tightening in ECB rates beginning 2027, which could further support the euro beyond 2025.
In other news, the dollar index rose by 0.19% on Thursday, and the EUR/USD fell by 0.03%. The unexpected drop in US weekly initial unemployment claims was to 217,000. The Eurozone July S&P composite PMI rose to an 11-month high of 51.0, and the manufacturing PMI rose to a 3-year high of 49.8. Precious metals were under pressure on Thursday due to easing global trade tensions and a stronger dollar, with August gold and September silver both closing down 0.71%.
[1] Central Bank Policies and the EUR/USD Exchange Rate [2] Global Reserve Currency Shifts and the EUR/USD Exchange Rate [3] Economic Outlook and Inflation Forecasts for the Eurozone [4] Market Sentiment and Technical Dynamics Affecting the EUR/USD Exchange Rate
- The European Central Bank (ECB) lowering its deposit facility rate in 2025 and anticipating rate hikes from 2027, while the US Federal Reserve's policy remains uncertain with a higher risk premium on US assets, suggests a potential appreciation of the euro against the dollar due to the influence of central bank policies on the EUR/USD exchange rate.
- The rise in the euro's share in global reserves, marking its highest since late 2022, and the dollar’s decline in global reserve currency implies a shift in preference towards the euro in global reserves, impacting the EUR/USD exchange rate through influence of global reserve currency shifts on the same.
