The euro hovered around $1.14 on Thursday, maintaining its position near the highest level since January 2022. This strength was primarily driven by broad-based dollar weakness, as traders scaled back their exposure to US assets amid growing uncertainty over the trajectory of US trade policy and broader economic conditions.
Euro close to three-year highs ahead of ECB
The euro has gained roughly 5% against the greenback so far in April, marking its strongest monthly performance in recent months. This rally comes as investors reassess the dollar’s role in the global financial system, with many increasingly viewing the common currency as a viable alternative to the US dollar, especially in light of rising geopolitical risks and trade tensions.
In addition to broader macroeconomic shifts, expectations of higher defense spending in Europe, particularly in Germany, have provided further upward momentum to the euro. Germany’s increased military spending in response to regional security concerns, along with a stronger fiscal stance, has added confidence to the eurozone’s economic outlook, further supporting demand for the euro. Analysts believe these moves could signal a more resilient and self-sufficient eurozone, reducing the reliance on dollar-denominated assets.
Eyes on today's ECB decision
On the monetary policy front, the European Central Bank (ECB) is expected to deliver its seventh rate cut since June, lowering the key deposit rate to 2.25% from 2.5%. This move is part of the ECB's ongoing efforts to stimulate economic activity and manage inflation. However, the stronger euro could help temper inflationary pressures within the eurozone, as the currency’s appreciation makes imports cheaper and eases some of the cost-push inflation faced by businesses and consumers. Markets are already pricing in at least two additional rate cuts by the end of the year, signaling expectations of a more dovish policy stance in the near future, especially given the region’s modest growth prospects.
In summary, the euro's rise reflects both short-term technical factors and longer-term shifts in investor sentiment, with a growing perception that the currency could offer a more stable and attractive option compared to the dollar in the current global economic climate. As central banks around the world adjust their policies in response to new economic realities, the euro's role on the global stage is likely to continue evolving, supported by a combination of monetary, fiscal, and geopolitical factors.
