The Financial Times provides details on the situation. Since the beginning of the month, the single currency has lost 2.6% and fallen to $1.135. This is the lowest level since early June 2025. Until recently, Wall Street analysts had predicted that the euro would rise to $1.20, but reality turned out to be different.
The decline accelerated after the U.S. and Iran reached an agreement to resume oil shipments through the Strait of Hormuz. The easing of geopolitical tensions offset the inflationary shock that had previously forced the ECB to raise borrowing costs.
At the beginning of the year, the euro was rising steadily: investors had lost confidence in the dollar due to Donald Trump’s unpredictable actions. However, the situation changed dramatically after the outbreak of military conflict in Iran in late February. Soaring oil prices dealt a blow to the growth prospects of Europe’s energy-dependent countries.
Now traders are shifting their focus back to the dollar. Eurozone Purchasing Managers’ Index (PMI) figures released on Tuesday pointed to a contraction. ECB President Christine Lagarde stated that the current data do not warrant “more decisive countermeasures at this stage.” At the same time, the U.S. Federal Reserve adopted a “hawkish” stance, which made dollar-denominated assets much more attractive.
The EU economy is slowing down
Recent macroeconomic data demonstrate the damage that three months of abnormally high energy prices have inflicted on the eurozone economy. This is forcing investors to exit their long positions in the euro en masse.
“The eurozone economy has slowed in response to the energy price shock. The combination of weak growth and falling energy prices is easing pressure on the ECB, relieving it of the need for further rate hikes,” explains Lee Hardman, senior currency economist at MUFG.
On Monday, JPMorgan lowered its euro forecast from $1.13 to $1.10. The reason cited was “stabilizing growth, steady inflation, and signs of the U.S. economy’s exceptional strength.”
The swap market still prices in one ECB rate hike of a quarter of a point by the end of the year. However, the probability of a second such move has fallen sharply—from 50% to 20%.
Analysts at Capital Economics believe that the June rate hike could be the last in this cycle. They expect inflation in the eurozone to return to the 2% target only by the end of 2027. The peak in price growth has already passed, and they believe the energy shock’s impact on wages will be weak.
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