The euro surged to its highest level in four years on Tuesday, September 16, as investors braced for an interest rate cut by the US Federal Reserve this week, underscoring a widening policy gap with the European Central Bank (ECB).According to Reuters, the common currency rose as much as 0.8% to $1.1853 on Tuesday — its strongest since September 2021 — while the US dollar index, which tracks the greenback against six peers, slipped 0.6% to 96.78, the lowest since July.
Fed easing vs ECB pauseThe rally reflects diverging monetary trajectories. With US labour market data weakening, markets are pricing in a 25 bps Fed rate cut on Wednesday, with scope for more easing later this year.“The dollar is trading with a heavy tone across the board as investors brace for a dovish message,” Karl Schamotta, Chief Market Strategist at Corpay, told Reuters. He added that traders were positioning for “sequential cuts in the months ahead.”Bloomberg noted the euro is already up 14% in 2025, heading for its best nine-month performance on record. The ECB, meanwhile, has signalled it is done easing. A wave of defence and infrastructure spending across Europe is expected to sustain growth and inflationary pressures, potentially forcing the bank to hold rates higher for longer — or even consider hikes.ALSO READ | How a Fed rate cut this week may affect RBI’s decision and your portfolioInvestor sentiment improvesSupport for the euro also came from fresh data. The ZEW research institute reported an unexpected rise in German investor confidence for September, a signal of cautious optimism in Europe’s largest economy. Meanwhile, eurozone industrial output in July showed modest resilience despite global trade tensions.
Kit Juckes, Head of FX Strategy at Societe Generale SA, wrote in a Bloomberg note: “Relative growth forecasts, relative rates, and the overall market backdrop are all on the euro’s side, for now.” He added that the chances of a move toward $1.20 have improved significantly.Traders eye $1.20Options market activity highlights the bullish tone. Bloomberg reported that more than two-thirds of euro-dollar contracts traded Monday were bets on gains, with strong demand for strikes above $1.20. Hedge funds, which previously used complex strategies to gain euro exposure, are shifting towards straightforward bullish wagers — a sign of rising conviction.Why it mattersThe euro’s rally illustrates shifting global monetary dynamics: the Fed is tilting toward easing to support jobs, while Europe’s policymakers are holding the line amid fiscal expansion. That divergence has investors betting the euro could extend its rally, potentially breaching $1.20 in the weeks ahead.Bloomberg also reported that Morgan Stanley strategists see tactical dollar positioning as neutral ahead of the Fed’s decision — suggesting the euro rally could extend if policymakers confirm expectations of three cuts this year.ALSO READ | Melt-up puts Nasdaq on track for 10-day streak
