Why Is the Dollar So Strong Against the Euro?
Why is the US dollar so strong against the euro? What causes this phenomenon?
Main Drivers of the Euro's Strengthening
- Driven by Europe's Economic Recovery
Recent positive Eurozone economic data, with economic activity resuming after the easing of pandemic controls, and market expectations of a policy shift by the European Central Bank (ECB), have boosted investor confidence in the euro. For example, between late 2024 and early 2025, the euro/dollar exchange rate repeatedly broke through key levels (such as 1.06), demonstrating the improving resilience of the European economy.
- Relatively Weak US Dollar
The US economy faces high inflation and pressure from policy adjustments. The Fed's slowing pace of interest rate hikes has weakened the US dollar index (DXY), indirectly driving the euro's appreciation. The weak US dollar has kept the RMB exchange rate relatively stable against the US dollar, while the strengthening euro has led to a passive depreciation of the RMB against the euro.
- EU Policy Support
The EU is stimulating the economy through fiscal expansionary policies, pushing up interest rates, further attracting capital inflows to the eurozone, and strengthening the euro's exchange rate.
Trend Analysis
▲ Political Stability in Europe
The recent surge in the euro is primarily due to three factors. First, Europe's political landscape is gradually becoming clearer, laying a solid foundation for future medium- and long-term economic growth. In particular, the pro-European Emmanuel Macron defeated the far-right Marine Le Pen in a landslide victory in the French presidential election, significantly boosting market confidence in the EU's future development. Meanwhile, German Chancellor Angela Merkel's approval ratings have also surged, stabilizing the EU's political landscape and driving the euro's gains.
▲ European Central Bank Policy Shift
Second, the ECB's monetary policy is shifting. Draghi hinted at the possibility of tapering its quantitative easing measures in the autumn at his recent interest rate meeting. Following this announcement, the euro's gains accelerated, successfully breaking out of its nearly three-year range and further fueling bullish market sentiment.
▲ The Impact of US Political Risk
- Third, US political risks are intensifying. In particular, the escalating Russia investigation has heightened investor concerns. Furthermore, the slow progress of Trump's campaign promises has left many investors impatient, further increasing selling pressure on the dollar and benefiting the euro. Future Trend Forecast
- Looking ahead to the second half of the year, the euro is expected to remain strong, driven by three major positive factors. In particular, the global central bank annual meeting at the end of August and the European Central Bank's interest rate meeting in September are expected to bring new volatility to the euro. Market expectations of the ECB tapering its easing policy have become a hot topic. Meanwhile, the direction of the Federal Reserve's monetary policy is also a key factor influencing the euro's performance. Although the Fed's interest rate meeting will be held after the ECB's, the expectation of the Fed's balance sheet reduction may limit the euro's potential upside.