The euro climbed above $1.13 on Wednesday, marking its strongest level since May 6, as broad-based weakness in the US dollar continued to provide upward momentum for the common currency.
Euro strengthens to two-week high on USD weakness
The greenback came under renewed pressure amid growing market anxiety over the US fiscal outlook, with debates surrounding a sweeping tax-cut proposal amplifying concerns about the trajectory of the federal budget deficit. These worries were further compounded by Moody’s recent downgrade of the US credit rating from Aaa to Aa1, citing unsustainable debt dynamics and a lack of credible fiscal consolidation measures. The downgrade has dented investor confidence in the US economy’s long-term stability and reduced the appeal of dollar-denominated assets.
In contrast, the euro found additional support despite lingering headwinds within the Eurozone. The European Central Bank’s May 2025 Financial Stability Review acknowledged mounting risks to the region’s financial resilience, highlighting the potential impact of global geopolitical tensions, persistent inflationary pressures, and ongoing uncertainty in fiscal and monetary policy. The report warned that deteriorating growth prospects, compounded by supply chain frictions and elevated borrowing costs, could weigh heavily on both households and businesses. Moreover, the ECB flagged rising public expenditure—particularly on defense and energy security—as a challenge to medium- and long-term debt sustainability for several member states.
Positive political developments
Still, some positive political developments helped stabilize sentiment across European markets. Earlier in the week, investor confidence was buoyed by news of a tentative breakthrough in post-Brexit negotiations between the European Union and the United Kingdom. The preliminary agreement, which covers key areas such as defense and security cooperation, fisheries management, and youth mobility programs, was seen as a constructive step toward rebuilding trust and strengthening cross-channel ties. The accord also reduced uncertainty around future EU-UK relations, which had been a persistent source of volatility in European asset markets since the UK's departure from the bloc.
Together, the combination of US fiscal fragility, improving diplomatic dynamics in Europe, and lingering safe-haven flows into euro-denominated assets has helped push the euro to multi-week highs. Analysts suggest that if these trends continue, the euro could remain well-supported in the short term, particularly if upcoming Eurozone economic data shows signs of stabilization or improvement.
