The Euro Gains Ground as a Safe Haven

The euro has experienced its most rapid appreciation in over a decade, with market participants increasingly speculating on a potential rise to $1.20, prompting strategists to revise their forecasts accordingly.

At the end of last week, Europe’s common currency reached its highest point in three years, driven by economic uncertainty stemming from U.S. tariff policies that have cast doubt on the dollar’s traditional status as a safe haven.

Data from the Depository Trust & Clearing Corporation indicates that three out of four options contracts purchased on Friday were aimed at further euro appreciation. Traders report that hedge funds are eyeing a move to $1.20, with analysts at Mizuho International Plc acknowledging a growing likelihood of the currency achieving this milestone—the highest since mid-2021—within the next few months.

“The FX market is currently positioned long on euros, and structural diversification trends will encourage many to embrace this theme,” stated Jordan Rochester, Head of Macro Strategy for EMEA at Mizuho International Plc. “My previous upside forecast of $1.15–$1.20 for this year is swiftly becoming a foundational expectation.”

The euro stands to gain significantly from the dollar’s weakness as investors reevaluate the greenback’s role in the global financial landscape, particularly following President Donald Trump’s aggressive tariff implementation and escalation of the trade conflict with China. Germany’s Finance Minister suggested on Friday that governments should capitalize on this opportunity to enhance the euro’s significance in international trade.

Strategists are now focused on the euro’s trajectory following a two-day surge of nearly 4%, climbing from $1.10 to approximately $1.15. As of 7:45 a.m. in London, the euro traded 0.5% higher at $1.1413.

Currently, none of the 51 respondents in Bloomberg’s FX poll anticipate the euro surpassing $1.15 this year. However, two traders based in Europe noted substantial volumes processed on Friday that aim to capitalize on further euro gains. Hedge funds are targeting a rise to $1.20 within the next three to six months, as Friday marked the second-highest volume for euro options ever recorded, according to DTCC data.

Market positioning for euro strength in the options sector has intensified notably. Risk reversals—a gauge of market sentiment measuring the demand for contracts to buy or sell the currency—saw a significant increase last week, with one-week contracts reflecting the highest bias toward a euro rally in five years. Volatility also surged, closing at its third-highest level since 2010.

Leveraged and institutional traders held long positions on the euro at their highest level in six months as of April 8, as per CFTC positioning data.

Underlying Structural Forces

Several key structural dynamics are supporting the euro’s ascent. Anticipated increased spending from Germany, following its historic decision to relax fiscal constraints, is expected to bolster the eurozone in the face of potential global economic downturns.

Moreover, regardless of the eventual tariff levels, Europe’s trade surplus with the U.S. is projected to diminish, resulting in reduced revenues being reinvested into dollar-denominated assets.

Valentin Marinov from Credit Agricole SA describes the euro-dollar pairing as “excessively overbought,” leading the French bank’s positioning model to adopt a short stance on the euro.

Erik Nelson, a macro strategist at Wells Fargo, cautions that any further strengthening of the euro may encounter obstacles. He emphasizes that shifts in reserve currency status “occur over months and quarters—not days.”

However, there is no denying that the euro is increasingly assuming some of the dollar’s traditional functions as a refuge amid rising concerns regarding the U.S. economy and, by extension, the greenback.

A Plausible Alternative to Treasuries

Once primarily regarded as a risk asset, the euro has been rallying in response to both positive and negative news, according to Van Luu, Global Head of Currencies at Russell Investments.

“I perceive a structural shift favoring the euro in the medium term within the evolving landscape of what constitutes a safe haven,” he remarked.