Market News

BY  Anya Andrianova(Bloomberg) -- The euro’s relentless rally stalled on Tuesday as US data failed to support an imminent interest-rate cut by the Federal Reserve, prompting traders to buy the dollar.

The greenback’s recovery pressured the common currency, leading it to trade slightly weaker on the day after it touched the highest level since September 2021 earlier in the session. If it were to close higher on Tuesday, it would have been the longest streak since 2004 and eclipsed only twice since the currency’s inception in 1999.

The Bloomberg Dollar Spot Index advanced to a session high after Donald Trump’s $3.3 trillion tax and spending cut bill passed the Senate. It was also gaining after the first of this week’s three reports on US labor market conditions failed to provide justification for a Fed cut as soon as next month.

“I think the knee-jerk reaction was to buy the dollar on lower fiscal policy uncertainty,” said Win Thin, global head of markets strategy at Brown Brothers Harriman & Co. “To me, pushing through a massive tax cut will eventually widen the budget deficit, which is ultimately dollar-negative.”

The common currency declined 0.1% to $1.1777 on Tuesday, after eight days of advances pushed options traders to ramp up bullish positioning. So-called risk reversals — a closely watched measure of market sentiment — posted the third-strongest bullish repricing of the year last week. Data from the Depository Trust & Clearing Corporation show that nearly two out of three options in the past week targeted a stronger euro.

The euro’s rally has been underpinned by a long-running slide for the dollar, with fresh momentum from weaker US data and growing conviction that the Fed is preparing to ease policy more aggressively than the European Central Bank. According to Danske Bank AS strategists led by Jens Naervig Pedersen, the dollar’s structural decline has resumed as geopolitical risks fade and focus returns to the US economy and political backdrop.

“We see many reasons to be short USD right now, including the possibility of a new Fed Chair being appointed earlier than expected, the Big Beautiful Bill on 4 July, and the tariff deadline on 9 July,” he said.

The euro has risen nearly 14% against the greenback this year so far, while a dollar index has fallen more than 9%.

Analysts increasingly see the euro rallying toward $1.20 in the coming months. Strategists at Societe Generale SA, including Kit Juckes, expect the common currency to peak at around $1.25 over the medium term, even if it lags the yen and some Asian peers in the second half of the year.

European Central Bank Vice President Luis de Guindos said Tuesday that while a move to $1.20 is “acceptable,” further gains would make policy makers’ task more complicated.

What Bloomberg Strategists Say

“While a mild strengthening of the currency doesn’t pose a particular concern for the ECB, gains that are too rapid tend to tighten financial conditions and may threaten to crimp economic growth.”

— Ven Ram, Macro Strategist, Dubai. Click here for the full piece.

For Nicholas Wall, head of Global FX Strategy at J.P. Morgan Asset Management, the ECB is doing the right thing by embracing a euro that’s attracting more demand as a reserve currency. “A stronger euro is good for Europe partly in the context of rising oil prices,” he said.

Euro Hits Strongest Since 2014 Against Yuan as Rally Continues

The latest euro-area inflation data offered little reason for the ECB to alter its stance. Consumer prices rose in France and Spain but held steady in Italy and unexpectedly eased in Germany, reinforcing the central bank’s view that inflation will converge sustainably toward its 2% target.

(Corrects previous euro level in second paragraph.)