The euro is expected to strengthen in 2025, thanks to political dynamics and economic policy shifts that are fueling gains against the U.S. dollar. While the euro may not unseat the dollar as the dominant global reserve currency, European Central Bank (ECB) officials suggest its status as a stable alternative is on the rise—particularly with robust policy support from EU institutions, as quoted on CNBC.
According to an ECB report from June, the euro’s share of global foreign exchange reserves has remained steady at about 20% over the past decade. In contrast, the U.S. dollar's share fell from 68.8% in 2014 to 57.8% at the end of 2024. The 2025 figures are still developing.
Invesco CurrencyShares Euro Trust FXE has gained more than 14% so far this year while Invesco DB US Dollar Index Bullish Fund UUP has lost more than 8%.
Tariff Tensions and Trade Deal Uncertainty
The outcome of ongoing U.S.–European Union trade negotiations remain unclear as of now. Washington’s recent trade pacts—with the U.K. and Vietnam—suggest a general trend toward higher tariffs on imports, albeit lower than previously threatened levels.
Uncertainty around these tariff policies, coupled with fears of inflation and sluggish economic growth, has driven the euro up by about 14% against the dollar in 2025. This rise has occurred even as the ECB cut interest rates and the Federal Reserve held rates steady.
U.S. Fiscal Policy Adds to Dollar Weakness
Last week, President Donald Trump achieved the passage of a sweeping tax and spending bill. While this move has energized domestic supporters, it is likely to increase the federal deficit—raising concerns among global investors already unnerved by erratic tariff policies.
“The dollar’s status won’t shift overnight,” Stournaras acknowledged, “but the euro is increasingly being viewed as viable for international reserves.” He stressed the importance of completing EU financial integration through a Banking Union and Capital Markets Union to fully unlock the euro’s potential, as quoted on CNBC.
Outlook: Euro Likely to Stay Supported
Looking ahead, the euro-dollar exchange rate is expected to remain volatile, due to developments in tariffs, central bank policy, and global risk factors. Yet analysts remain optimistic about the euro's resilience.
The Eurozone economy expanded by 0.6% in the first quarter of 2025, doubling the earlier estimate of 0.3% and marking the strongest growth since Q3 of 2022, driven by Ireland’s exceptional 9.7% surge and a stronger-than-initially-reported performance from Germany. Such upbeat GDP data also contributes to the euro’s strength.
Foreign Appetite for U.S. Assets Is Shrinking
Deutsche Bank strategists George Saravelos and Christian Wietoska said that the U.S. dollar is weakening because foreign investors are no longer buying as many U.S. assets. They recently noted that while investors don’t need to sell, but just choosing not to buy more is sufficient to put pressure on the dollar.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports Invesco CurrencyShares Euro Trust (FXE): ETF Research ReportsThis article originally published on Zacks Investment Research (zacks.com).
Zacks Investment Research
