Euro Poised for Best Run Since 2017 as Dollar’s Slump Picks Up

(Bloomberg) -- The euro is set for its longest stretch of monthly gains in eight years, boosted by rising confidence in Europe’s economic prospects and a hunt for alternatives to the slumping dollar.

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The common currency is up more than 3% in June, its sixth month of advances. Those gains have come as the dollar falters, with the Bloomberg Dollar Spot Index near its lowest level in more than three years. The dollar gauge ended the week lower by 1.2%.

The currencies are moving in separate directions on wagers that the Federal Reserve will cut interest rates at least two times this year while the European Central Bank is coming to the end of its easing run. Money markets are pricing in about 60 basis points of Fed easing by year-end, compared with just about 25 basis points from the European Central Bank, and currencies tend to benefit from higher rates.

Speculative traders boosted bets on the dollar decline in the week through June 24, turning the most negative on the greenback in about two years, according to Commodity Futures Trading Commission data released Friday. They now hold some $20.1 billion worth of positions tied to a weaker US currency — the largest amount since July 2023. Meanwhile, hedge funds turned bullish on the euro first time since April, according to the CFTC.

Adding to the outlook for the dollar is speculation the next Fed chair will heed President Donald Trump’s calls for aggressive rate cuts.

Helen Given, a foreign-exchange trader at Monex Inc., sees the index declining by as much as 9% if Trump names a dovish successor to Jerome Powell this year. It’s already down nearly 9% year to date, after declining 1.4% this week.

“The fortunes of the macro US economy for the back half of this year don’t look so great,” she said, citing recent data, including a weak reading on gross domestic product.

Fed Path

The opposing outlooks for the euro and dollar show how currency traders are returning their focus to the Fed’s path on rate cuts following a bout of geopolitical risks in the Middle East and worries over the impact of trade tariffs.

“The fleeting support for the greenback, born of geopolitical tensions and its traditional safe-haven appeal, has all but evaporated,” said Antonio Ruggiero, strategist at foreign exchange and global payments firm Convera. “The euro will continue to benefit from persistent dollar pessimism.”

European policymakers have called for steps to boost the euro’s global standing amid the shifting landscape. Meanwhile, risk reversals on the dollar index have once again turned negative across the curve, pricing a weaker greenback going forward.

“US interest rates can decline more quickly in coming months than in much of the rest of G-10,” wrote strategists at UBS Investment, explaining that it will weigh on the greenback and propel the euro and the yen. They forecast the common currency will reach $1.23 and the yen to trade at 130 per US dollar by year end.

The euro is among the best performers against the dollar this year so far, advancing about 13%. It pared gains after climbing to $1.1753 on Friday, the highest level since September 2021.

What Bloomberg Strategists Say...

“European currencies are best placed to transform the dollar’s weakness into strength given that the Bank of Japan is dragging its feet on further policy tightening. Even so, the euro’s journey higher will be far from linear.”

— Ven Ram, Markets Live strategist. Click here for the full piece.

Earlier on Friday, a report showed that US consumer spending declined in May by the most since the start of the year. The Fed’s preferred inflation gauge — the core PCE price index — rose 0.2% on a monthly basis, slightly more than expected.

“Higher PCE readings and weaker personal spending feeds into the stagflation story,” said Win Thin, global head of markets strategy at Brown Brothers Harriman & Co. “Not a good combo for the dollar.”

--With assistance from Mark Cranfield, George Lei and Carter Johnson.

(Updates prices throughout, adds dollar positioning from CFTC in 4th paragraph.)

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