EUR has been on the rise lately, due to major macroeconomic and geopolitical shifts across the globe. However, the main source of the EUR’s appreciation comes from the United States. From January to July 1, the EUR/USD major currency pair has surged greatly from 1.0243 all the way up to 1.1803. Analyzing all the reasons and fundamental forces behind this bullish momentum will make it clear why EUR is appreciating against the dollar so much and whether it could continue like this.
Monetary policies
If you wanted to convert 1000 euros to dollars, now is the best time to do so, as the rate of the major currency pair makes the dollar very cheap. In other words, your euro costs more dollars. European Central Bank’s (ECB) aggressive rate cuts brought rates to around 2%, which increased demand for euros. Despite lowered US inflation, the Fed held rates at around 4.5% because of tariff-driven inflation risks. While interest rates are crucial for currencies and they historically tend to shake currency markets, the main damage came from tariffs. It amplified all the inflation. We will expand on this later; let’s now continue with monetary policies. Another crucial metric for the currency interest rates that affects inflation is the U.S. 10-year Treasury constant maturity yield. It plunged as investors questioned dollar asset reliability, and coupled with increased demand for euros, we got a strong uptrend in EUR/USD since January. The inflation trend is actually slightly lower for the euro, which further amplified the appreciation of the EU currency.
Trade wars and tariffs
Let’s now switch our analysis to the elephant in the room, tariffs and the US-China trade war. Tariffs make it much more difficult to conduct business for countries that impose tariffs on each other. Trump’s aggressive tariff stance strengthened investors’ fears for US dollar inflation in the medium to long term, which was the main driver behind the strong EUR/USD uptrend, which persisted for months. New 25% tariffs on Japanese and South Korean goods and 50% on copper fueled growing fears, shaking the USD’s safe-haven status. The President goes as far as to speak about imposing higher taxes on foreign investors, further driving fears. As a result, Japanese investors and businesses found it really difficult to invest in the US economy, which hurt the USD’s strength, as Japan is known for its lower rates and carry trade strategies.
EU-USD deal optimism
Progress toward a 10% tariff framework with Airbus carve-outs further boosted euro confidence. Trump loves making deals, and it is a matter of time before the two regions make a deal that makes the impact of tariffs as insignificant as possible. The USA and Europe have been close allies for many decades, and the two will likely make a deal that won’t hurt either of their economies.
Geopolitics
ECB President Lagarde is an open advocate for elevating the euro as a shield against U.S. coercive measures. She outlined 3 pillars of strategy in her Berlin speech: trade openness, capital market reforms, and legal fortification. The euro’s share of global reserves rose to 22% as Trump’s policies forced diversification. JP Morgan notes that no-dollar investors are now buying euros to hedge against USD weakness. If the euro’s role as a reserve currency continues to grow while the USA prefers tariffs and isolationist policy, we should see even higher rates for the EUR/USD pair.
Traditional USD safe-haven assets such as Treasuries lost appeal, and European bonds, especially German Bunds, saw serious inflows as their yield rose during April’s tariff volatility.
Outlook: How high can the euro go?
The near-term trajectory is undoubtedly bullish for the EUR/USD pair, and we might even see the EUR reach 1.20 in 2025. If the U.S. inflation rises and forces the Fed to raise rates, then we will see a correction and a possible switch to a bearish trend. However, as of now, tariffs, EU strategies to make the euro more important globally, coupled with global trade wars and overall market uncertainty, indicate that the EUR/USD pair will likely continue to climb; also, the exact rate and speed are difficult to define.