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The Euro (EUR/USD): What Drives It, Who Wins, and Who Loses

The euro is the shared currency of 20 European countries and the second most traded currency in the world. Its exchange rate against the US dollar is the most watched currency pair globally. Between early 2023 and early 2026, the euro swung from around $1.10 down to $1.04, then surged past $1.20. These moves ripple through inflation, exports, borrowing costs, and economic growth across a region that produces roughly 15% of global output.

Main drivers

What pushes the euro up

• Weak US economic data — When American jobs or growth numbers disappoint, markets expect the Federal Reserve to cut interest rates, making the dollar less attractive and pushing money toward the euro.
• Erosion of confidence in the dollar — When investors question the dollar's status as the world's dominant reserve currency, they look to the euro as the leading alternative.
• European fiscal expansion — Government commitments to spend more, especially on defense, signal stronger future growth and attract investment into European assets.
• ECB holding rates steady — When Europe's central bank resists cutting rates, it keeps the interest paid on euro-denominated assets relatively attractive.
• Eurozone economic resilience — Growth that beats expectations draws capital into European markets and lifts the euro.

What pushes the euro down

• Strong US economic data — Hot jobs reports and rising inflation in America raise expectations that the Federal Reserve will keep rates high, pulling money into the dollar and away from the euro.
• ECB rate cuts — When Europe's central bank lowers rates, the gap between US and European rates widens in the dollar's favor, reducing the appeal of holding euros.
• Falling European inflation — Lower inflation gives the ECB room to cut rates, which weakens the currency.
• US tariffs on European goods — Trade barriers threaten European export growth and push markets to expect faster ECB rate cuts to cushion the blow.
• Political instability in Europe — Hung parliaments, lost confidence votes, and budget crises shake investor confidence in European assets.
• Weak Eurozone growth — Sluggish GDP and declining business activity reduce demand for the euro and feed expectations of more rate cuts.
• Rising oil prices — Higher oil feeds US inflation, strengthening expectations for higher US rates and a stronger dollar.

Historical examples

When the euro fell

• Strong US economic data

  • September 2023 US jobs surge — US employers added 336,000 jobs, nearly double what forecasters expected. The euro slid toward $1.05, its weakest level since early January 2023.
  • October 2023 producer price surprise — US producer prices rose 0.5% in a single month against a 0.3% forecast, with gasoline jumping 5.4%. The euro fell back below $1.06 as investors rushed to the dollar.
  • December 2024 Fed rate signal — The Federal Reserve signaled only 0.50 percentage points of rate cuts for 2025, half what it had projected months earlier. The euro dropped to $1.04, near its lowest since late 2022.

• ECB rate cuts

  • June 2024 first cut in five years — The ECB lowered rates for the first time since 2019. The euro fell past $1.075 to a one-month low.
  • December 2024 fourth cut — The ECB cut rates for the fourth time that year and lowered its growth forecasts. The euro sank to $1.04.

• Falling European inflation

  • September 2024 inflation drop — French inflation fell below 2% for the first time in over three years, and Spanish inflation dropped to 1.7%. The euro slid more than 0.3% as markets priced in faster ECB cuts.
  • January 2024 cooling prices — Inflation eased in Germany and France. The euro hovered near $1.08 as investors fully priced in an ECB rate cut by April.

• US tariff threats

  • November 2024 tariff warnings — Senior ECB officials publicly warned that new US trade barriers could harm Eurozone growth. The euro weakened to $1.0559 and lost about 3% for the month, its worst monthly performance in over a year.

• European political instability

  • July 2024 French hung parliament — Parliamentary elections produced no clear majority. The euro dipped to $1.08 on concerns about legislative gridlock and fiscal risk.
  • Late 2024 twin crises — Germany's chancellor lost a confidence vote while France's new government struggled to pass a budget. Combined with other pressures, the euro became the worst-performing major currency.

• Weak Eurozone growth

  • April 2023 GDP miss — Eurozone GDP grew just 0.1% against a 0.2% forecast, with Germany stagnating. The euro dropped below $1.10 from a one-year high.
  • November 2024 German business slump — Germany's business activity index fell to a nine-month low, with five straight months of decline. This added to the euro's steep monthly loss.

• Rising oil prices

  • September 2023 oil rally — Oil prices climbed toward $84 per barrel on supply cuts and a large US inventory draw. Higher oil fed US inflation fears and rate expectations, contributing to the euro's fall toward $1.05.

When the euro rose

• Erosion of confidence in the dollar

  • April 2025 dollar reassessment — After reports that the US president was studying the removal of the Federal Reserve chair, investors began questioning the dollar's role in the global financial system. The euro surged to $1.15, its strongest since late 2021. It gained roughly 5% in April alone as markets increasingly viewed the euro as a viable alternative.
  • January 2026 dollar hits four-year low — The euro surpassed $1.20 for the first time since mid-2021, supported by broad dollar weakness.

• Weak US economic data

  • September 2025 jobs miss — US employers added just 22,000 jobs against a 75,000 forecast. Markets fully priced in a Fed rate cut. The euro climbed toward $1.18.

• European fiscal expansion

  • Early 2025 German spending plans — Germany agreed to loosen its strict fiscal limits and boost defense spending. Expectations of higher government investment added upward momentum to the euro.

• Eurozone economic resilience

  • Q1 2025 growth surprise — The Eurozone economy grew 0.4%, double the expected pace, supported by easing inflation, lower borrowing costs, and renewed optimism around German fiscal plans.

• ECB holding rates steady

  • January 2026 rate pause — The ECB held rates steady for a second consecutive meeting, describing its policy stance as being "in a good place." This supported the euro near $1.20.

Who benefits

When the euro rises

• European consumers — A stronger euro makes imported goods cheaper, easing the cost of living.
• European bond holders (Italy, Germany, France) — A strong euro dampens inflation expectations, leading markets to expect lower rates, which pushes bond prices up. Italian 10-year bond interest fell to 3.7% in April 2025 as the ECB gained room to cut.
• European borrowers — Lower ECB rates, enabled by the euro's inflation-dampening effect, reduce borrowing costs. Household lending in the Eurozone grew at its fastest pace in two years by mid-2025.
• Gold — ECB rate cuts reduce the interest paid on bonds, making gold more attractive by comparison. Gold hit a record above $3,400 per ounce in April 2025.

When the euro falls

• European export-heavy manufacturers — A cheaper euro makes European goods less expensive abroad, boosting sales. German stock markets hit record highs in late 2024 partly because a weaker euro lifted export revenues.
• US consumers buying European goods — A stronger dollar stretches further when purchasing European products.
• Dollar-denominated asset holders — Capital flowing into the dollar lifts the value of US bonds and money market funds.

One important pattern to note: the euro contains a built-in stabilizer. When it strengthens, it pushes European inflation down, which gives the ECB reason to cut rates, which then puts downward pressure back on the euro. ECB officials flagged this loop explicitly in early 2026, warning that further euro strength could force them to resume rate cuts. This self-correcting cycle tends to prevent the euro from moving too far in either direction for too long.