Euro powers ahead as confidence in US Dollar wavers

The euro has continued its upward momentum, reaching its strongest level against the US dollar since November 2021 and surpassing the short-term target of $1.15. This rally reflects growing doubts among investors about the long-standing dominance of the dollar in global finance, with many increasingly turning to the euro as a compelling alternative.

Since January, the euro has surged by 13% against the dollar—one of the fastest and most significant climbs in the past five years. Despite the scale of the rise so far, there is speculation that the rally still has room to run. Should the euro replicate the kind of rebound seen in 2023, the EUR/USD exchange rate could edge closer to $1.20.

This renewed strength has emerged as the European Central Bank shifts course, moving away from the sharp rate increases of two years ago toward more supportive monetary policies. Although some market indicators suggest the euro may be overstretched, ongoing trade tensions and global economic uncertainty may act as a counterbalance—reducing the likelihood of sharp reversals and helping to maintain the euro’s upward trajectory.

Dollar slumps as political tensions rattle investor confidence

The US dollar has stumbled nearly 10% so far this year, dragged lower by weaker-than-expected economic performance, the unwinding of bullish positions, and a shift of capital away from American markets. Selling pressure intensified on Monday, driven by renewed market unease over President Donald Trump’s threats to remove Federal Reserve Chair Jerome Powell before his term concludes next May.

Trump’s persistent criticism of Powell’s reluctance to cut interest rates has unsettled investors, triggering a sharp 3% drop in the S&P 500. This episode offered a glimpse into the potential market fallout should political efforts succeed in disrupting central bank leadership. With economic uncertainty already hovering at unprecedented highs, the US administration’s confrontational tone is fuelling volatility and complicating decision-making for investors and policymakers alike.

Concerns are growing over the perceived erosion of the Federal Reserve’s independence—a cornerstone of market stability. This blurring of the line between politics and monetary policy is prompting a reassessment of the dollar’s traditional safe-haven role and sparking a sell-off in American assets.

During light post-holiday trading, the dollar extended its losses, approaching levels last seen three years ago. Treasury markets reflected mixed sentiment, with gains in short-term bonds and losses in longer maturities. As confidence in the dollar wanes, investors are increasingly turning to safer options such as gold, the euro, the yen, and the Swiss franc in search of shelter from the rising political storm.

Pound rallies against Dollar, but faces limits elsewhere

The British pound is set to notch up an eleven-day rise against the US dollar—potentially marking its longest uninterrupted climb on record. GBP/USD has now pushed past $1.34, its strongest level in seven months, with gains of 7% year-to-date. Much of this advance reflects the weakening US dollar rather than a surge in confidence towards sterling, as ongoing doubts over President Trump’s trade stance continue to drag on American financial markets.

Surprisingly, even cooling UK inflation figures failed to halt the pound’s momentum. Headline CPI eased to 2.6% annually, while services inflation dropped to 4.7%. These softer readings have reduced pressure on the Bank of England, giving it more breathing room and prompting traders to raise expectations for interest rate reductions—now totalling 86 basis points by year-end. This may offer the central bank greater flexibility to support the economy, particularly given the global backdrop of trade friction and rising living expenses.

Looking ahead, the pound appears well-positioned within the broader European currency group, which is expected to perform strongly this year. The UK’s reduced exposure to the fallout from US tariffs has also helped underpin its relative resilience.

However, challenges closer to home may hold the pound back. Despite recent gains against the dollar, sterling’s performance against other European currencies has been far less convincing. GBP/EUR remains near €1.16, down more than 3% in 2025. In effect, while external conditions have helped push GBP/USD higher, persistent domestic pressures are likely to cap sterling’s strength beyond the dollar, limiting its broader upside for now.

Looking ahead

This week sees European officials travelling to Washington for a series of high-level discussions, where global trade disputes are expected to dominate the agenda. The spring gatherings of the International Monetary Fund and World Bank, along with the G20 meeting of finance ministers and central bank governors, come at a time when international cooperation is under increasing strain.

Rising concern surrounds the United States’ threats to distance itself from key global institutions—bodies it was instrumental in shaping. Such moves are prompting fears over the long-term resilience of the global financial framework and the effectiveness of collective economic decision-making.

On the economic data front, attention will turn to preliminary manufacturing and services PMI readings, providing a snapshot of current activity in leading economies. Germany’s Ifo business climate index will also be closely watched, as it remains a key forward-looking indicator for the eurozone’s economic outlook.