The U.S. dollar’s upward trajectory is anticipated to continue, with a growing number of currency strategists predicting the euro will drop to or below parity with the dollar.
This sentiment has intensified compared to last month, with nearly one-third of those polled by Reuters now expecting this outcome, an increase from one-fifth previously.
The dollar, measured by the.DXY index has surged over 7% against a basket of major currencies since late September. This rally has pushed the euro down to nearly $1.01 on February 3, closely approaching parity, a level last seen in November 2022. The robust dollar trend is supported by recent data from the U.S. Commodity Futures Trading Commission, which reveals a significant rise in “bullish” dollar bets, with net-long positions reaching a near-decade high last month.
Strategists from a February 3-5 Reuters survey, which includes 47 FX experts, are confident that the dollar’s strength will persist. An overwhelming 85% majority believe that the current bullish positioning will either remain stable or increase further by the end of February. Meera Chandan, head of FX at J.P. Morgan, attributes the bullish outlook to factors such as the escalating trade conflict, higher U.S. bond yields, strong economic growth, and a robust equity market, all of which support the forecast of the euro testing parity in the first quarter.
The dollar’s gains have been further cemented by the resilience of the U.S. economy and President Donald Trump’s inflationary policies, such as tariffs and tax cuts, which have dampened market expectations for further Federal Reserve rate cuts. However, Chandan notes that the dollar’s outperformance may wane over time, but there is low conviction on when this turning point will occur.
Analysts also point to Trump’s unpredictable policy announcements as a complicating factor for forecasting, with year-ahead euro estimates being the most varied since May. Alex Cohen, an FX strategist at Bank of America, highlights the market’s sensitivity to daily headlines and the potential negative economic implications of a trade war.
The latest poll shows a sharp shift towards dollar dominance, with nearly one-third of strategists expecting the euro to reach parity or lower within their three-, six-, or 12-month forecasts. The median survey view suggests the euro will stabilize at $1.03 in the next three to six months and then potentially strengthen to $1.05 by the end of January. The most pessimistic forecast for the euro is $0.97, marking the lowest in two years.
While analysts have often incorrectly predicted dollar weakness in the past, recent months have shown signs of a shift in expectations. Nearly half of the strategists surveyed believe the euro will trade weaker over the next six months, influenced by the prospect of ongoing European Central Bank rate cuts.
Fed policymakers’ inclination towards slower rate cuts has led interest rate futures to price in only one more cut this year, with uncertainty about a second. Dan Tobon, head of G10 FX at Citi, suggests that despite potential volatility, the dollar is unlikely to fall significantly as long as U.S. growth continues to outperform and tariff risks remain.
