Euro Future Trend: New Exchange Rate Pattern Amid the Wave of De-dollarization

The appreciation fluctuations of the euro against the US dollar reflect profound changes in the global financial landscape. When geopolitical risks coincide with economic policy uncertainties, market judgments about the euro’s future trend become more complex and volatile. In mid-January, the euro briefly rose to a year-high of 1.1768 against the dollar, nearly a 1% increase, while the dollar index simultaneously fell by 0.7%. What investment logic lies behind this volatility?

The “Perfect Storm” of Geopolitics and Economic Policies

The escalation of US-Europe trade tensions triggered by the Greenland dispute became the direct catalyst for the euro’s appreciation. US President Trump threatened tariffs on Europe, prompting European considerations of reciprocal measures, raising fears of a trade war between the US and Europe. Meanwhile, Japanese Prime Minister Suga proposed a plan to cut the consumption tax on food, which triggered a chain reaction in the bond markets. The yield on Japan’s 40-year government bonds soared to 4.24%, a record high, leading to a rapid rise in US Treasury yields. These series of changes directly impacted global capital allocation strategies.

Against this backdrop, European assets became relatively more attractive, prompting international capital to reassess the investment value of dollar-denominated assets.

The Real Version of De-dollarization: The Wave of US Asset Rebalancing

George Saravelos, Head of FX Research at Deutsche Bank, pointed out that the so-called “de-dollarization” is now revealing its true face. European countries hold about $8 trillion in US bonds and equities—almost twice the total US assets held by other countries worldwide. With US dollar exposure at high levels, recent developments over the past few weeks are driving a wave of US asset rebalancing.

If European countries actually implement strategies to sell US assets in response to trade threats, this could exert substantial downward pressure on the dollar, thereby supporting euro appreciation.

TACO Trading: A Game of Uncertainty

Market analysts at Fannie Mae Credit highlighted another key variable—the “TACO trade” (referring to the expectation that Trump might back down at the last minute during negotiations). Trump’s tariff threats may be just bargaining chips rather than final policies. Such policy reversals are expected to provide some support to the dollar. In other words, the market must consider both escalation and de-escalation scenarios in US-Europe relations, which explains the high uncertainty in the euro’s future trajectory.

Warning of Greater-than-Expected Volatility

Morgan Stanley issued a warning that should not be ignored. The firm cautioned that traders are underestimating the risks of extreme scenarios, and the euro could fluctuate by 10% or more in either direction from current levels. This means that both sharp appreciation and depreciation are possible, with volatility potentially exceeding market expectations.

Increased short-term euro volatility has become an unavoidable trend. Investors tracking the euro’s future movements should closely monitor US-Europe negotiations, the Bank of Japan’s policy stance, and changes in global capital flows.