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The euro has fallen to its weakest level in more than a year against a resurgent dollar, as investors bet that falling oil prices and signs of weakness in the economy make the European Central Bank less likely to pursue further interest rate rises.
The single currency, which Wall Street analysts had expected to hit $1.20 this year as investors reassessed their dollar exposure, has tumbled 2.6 per cent so far this month to $1.135, its weakest level since early June 2025.
The decline has come as the US-Iran deal to restore oil flows through the Strait of Hormuz lessens the severity of an inflationary shock that had already prompted the ECB to lift borrowing costs this month.
At the same time, recent economic data points to an economic hit from the three-month period of elevated energy prices, making investors reluctant to pile back into their bullish euro bets from the beginning of the year.
“The Eurozone economy has slowed in response to the energy price shock,” said Lee Hardman, senior currency economist at MUFG.
“The combination of weaker growth in the Eurozone and lower energy prices is helping to ease pressure on the ECB to hike rates further.”
The euro had strengthened sharply against the dollar at the start of this year, benefiting from investors cooling on the greenback as US President Donald Trump pursued what was then described as a series of “chaotic, off-the-cuff” policy moves.
But the dollar regained ground, and the euro slumped, after the US-Iran war began at the end of February, as oil prices soared and threatened to stymie growth in heavily energy-importing European countries.
Investors are now responding to signs of economic weakness. Purchasing managers’ indices on Tuesday for the euro area showed a contraction in activity, and ECB president Christine Lagarde said this week that recent economic data did not demand a “more forceful policy response at this stage”, after the recent rate rise.
Meanwhile, traders have added to their bullish dollar bets after last week’s hawkish turn at the Federal Reserve raised expectations of rate rises, boosting the relative attractiveness of the dollar.
The euro is also down 0.4 per cent against sterling this month, and on Wednesday it touched its lowest level since last August.
But its bigger drop against the dollar reflects a broad-based rally in the greenback after the Fed vowed to get on top of inflation that has risen above 4 per cent, amid a resilient economy.
JPMorgan said on Monday it had lowered its euro target from $1.13 to $1.10 on a mixture of “stabilising growth, sticky inflation and shades of US exceptionalism”.
Traders are still fully pricing one quarter-point rate rise by the ECB by the end of the year, but the chance of a second has fallen from 50 per cent to 20 per cent, according to levels implied by swaps markets.
The ECB could be “one and done” with rate rises, said analysts at Capital Economics, who expect euro area inflation to fall from above 3 per cent in May back to the central bank’s 2 per cent target by the end of 2027.
“We think headline inflation is already close to its peak, as energy inflation should decline while increases in food and core inflation should be small,” they wrote in a note this week, adding that they think second-round effects on wage growth will be “trivial”.
