Euro loses twice as dollar strength pushes EUR/USD to 1.14

The euro has fallen more than 5% from its 2026 peak as the dollar benefits from hawkish Fed policy and a resilient US economy, while the Eurozone grapples with energy shocks and slower growth.

The EUR/USD exchange rate stabilized near 1.1410 Monday after a sharp June sell-off that erased gains from earlier in the year, as stronger US economic data and geopolitical tensions in the Middle East boosted demand for the dollar. The pair briefly traded above 1.20 in the first quarter — its highest since 2021 — before reversing course as the Federal Reserve signaled a more aggressive policy stance.

"The euro lost twice against the dollar this year," Berenberg strategists said in a note published Monday. "Not only did the Iran conflict and higher energy prices weaken the Eurozone economy, but the US economy simultaneously received a boost from the AI investment boom and stronger-than-expected economic data."

The dollar is on track for its strongest monthly gain since July 2025, driven by data showing core PCE inflation held at a three-year high and first-quarter GDP was revised higher. The Fed's hawkish June meeting — where officials signaled the possibility of a 25-basis-point rate hike this year — pushed the fed funds rate to 3.75%, compared with the ECB's 2.15%. Markets now price a roughly 40% probability of a Fed hike by December, according to OIS pricing.

The divergence matters because it tightens global financial conditions and pressures Eurozone import prices. A sustained dollar rally also weighs on emerging market currencies and multinational corporate earnings, while a weaker euro could complicate the ECB's inflation fight by raising the cost of imported goods. Eurozone inflation stands at 3.2%, still above the ECB's 2% target, while US inflation is at 3.8%.

Why the euro's losses may be temporary

Berenberg expects the medium-term outlook to be more balanced. The bank argues that growth differentials between the US and the Eurozone will narrow as Germany's fiscal stimulus program — announced earlier this year — begins to feed through to economic activity. The last time the euro traded below 1.14 was in April 2025, preceding a recovery that pushed the pair above 1.18 within three months as Eurozone data improved.

"The currency is likely to continue to struggle in the short term," Berenberg said, "but improving Eurozone growth prospects should provide support for EUR/USD over the medium term as the current divergence in economic momentum begins to fade."

The eurozone economy has been hit harder than the US by the Iran conflict's impact on energy prices, with Brent crude falling almost 20% over the past two weeks as tanker traffic through the Strait of Hormuz recovered. Still, the earlier price spike pushed up input costs for European manufacturers, widening the growth gap with the US, where the AI investment boom has provided a significant economic tailwind.

What to watch this week

The key catalyst for the dollar this week will be Thursday's non-farm payrolls report. Consensus estimates call for a marked slowdown in June hiring, which could trim Fed rate hike expectations and weigh on the greenback. However, recent payroll reports have consistently beaten forecasts, extending the dollar's bullish momentum each time.

Fed Chair Kevin Walsh is also scheduled to speak Wednesday at the ECB's annual Sintra Forum, where his remarks will be scrutinized for any shift in the policy outlook. Eurozone inflation data due this week will provide the other half of the cross-Atlantic picture, with traders watching for signs that price pressures are easing enough to allow the ECB to hold or cut rates. The ECB's next policy decision is scheduled for July 24.

This article is for informational purposes only and does not constitute investment advice.