The euro traded near its highest level since 2021 against the dollar, driven by a combination of factors including easing concerns about the Federal Reserve’s independence, increasing doubts about the dollar’s dominance, and expectations of increased defense spending, especially in Germany. The dollar recovered slightly after comments from President Trump, but the euro has still seen significant gains in April. The ECB cut its deposit rate as expected but also signaled a potentially worsening economic outlook.
- The euro traded around $1.14, just below the $1.15 peak reached earlier this month, its highest level since 2021.
- The euro has climbed over 5% against the dollar so far in April.
- Support came from expectations of increased defense spending, particularly in Germany.
- The ECB cut its deposit rate by 25bps to 2.25%, the lowest since early 2023.
- The ECB removed language referring to its policy stance as “restrictive”.
- The ECB warned that the economic outlook has worsened due to escalating trade tensions.
- Markets are now betting on two or three more 25bps rate cuts by the end of the year.
Overall, the confluence of factors suggests a positive outlook for the euro, despite the ECB’s dovish stance and concerns about the economic outlook. Its strength stems from a shift in investor sentiment away from the dollar, support from governmental fiscal decisions, and the perception that it offers a viable alternative in the global financial system. The potential for further ECB rate cuts is already priced into the market, mitigating some of the negative impact of such moves.