The euro is gaining strength against the US dollar as global growth slows and disinflationary pressures rise outside the United States. This shift reverses the emerging market boom of the 2000s and impacts currency valuations.
ING reports that defensive currencies like the yen and Swiss franc are favored due to their liquidity and current account surpluses. The US dollar's safe-haven status is challenged by its current account deficit.
Medium to long-term investors are increasing their FX hedge ratios on US investments, as seen in the FX options market. Central banks may also reduce their dollar holdings, potentially favoring the euro due to its bond market liquidity.
The dominant factors for EUR/USD this year include the end of US exceptionalism, the Fed versus ECB easing dynamic, and lower energy prices. ING forecasts EUR/USD trading towards the top-end of a 1.10-1.15 range by the end of June.
While EUR/USD could correct lower later in the year, the Fed's expected easing in the third quarter should offset those forces. EUR/USD could trade into a 1.15-1.20 range in the latter half of 2026 as fiscal stimulus supports eurozone growth and the ECB prepares to hike by the end of the year.