Dollar loses ground: euro smells its chance

The US dollar has been in the corner of the pack in recent weeks, and the euro is profiting from this. Even rising tensions in the Middle East and a pause by the Federal Reserve are not changing this.

Actions usually speak louder than words. However, at tomorrow's meeting of the US central bank, the focus will be much more on the explanation than on the actual interest rate decision. It is already virtually certain that the policy rate will remain unchanged at 4,25% to 4,5%. Although consumer and producer confidence is under pressure, President Donald Trump's unpredictable policy is not yet translating into a rapid cooling of the economy. As long as it is not necessary to give the economy a boost, Federal Reserve Chairman Jerome Powell prefers to keep the interest rate at the same level with a view to inflation.

Expensive oil makes itself felt
In May, US inflation rose slightly for the first time in four months to 2,4%. That is slightly above the central bank's target. The escalating conflict in the Middle East could cause that increase to continue. Since the end of May, the price of a barrel of Brent oil has already risen by more than 15%. The chance that an American interest rate cut will come before the summer has therefore decreased considerably. That is usually a favourable development for the dollar, while the currency often also benefits from increasing market unrest. But in the past four months, the euro has risen by almost 10% against the dollar.

Remarkable euro strength
The rise in the value of the European currency is even more impressive when you consider that both currencies seemed well on their way to becoming equal in value at the beginning of 2025. You now get $1,15 for your euro. The main reason for the euro's strength is the uncertainty created by all the measures that Trump announces, implements and then just as quickly postpones. The most recent example is a levy that foreign investors may have to pay on their returns. This can rise from 5% in the first year to 20% three years later. More and more parties are turning away from the American currency, which is already being described in the currency world as de-dollarization.

Pandora's Box
It was recently reported that the dollar's share of global foreign exchange reserves has fallen to 57,3%. This is the lowest point since the IMF started recording this data in 1995. The European Central Bank (ECB) is already enthusiastically promoting the euro as an alternative to the dollar. ECB President Christine Lagarde recently emphasized that geopolitical developments are opening the door for the euro to play a much greater international role. Although Trump is undoubtedly pleased with the improvement in the international competitive position of American companies thanks to the currency effect, marginalization of the dollar was not in the plans. It will be very interesting to see how he tries to close this Pandora's box again.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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