January 29th Electric – The euro against the U.S. dollar exchange rate briefly broke through the important 1.20 level on January 28th, hitting a high since 2021. Although it later pulled back to around 1.19, bullish sentiment in the market remains strong, bringing dual impacts to the euro zone economy. The euro’s sustained strength stems partly from the structural weakness of the U.S. dollar and partly poses significant pressure on the euro zone’s exports and inflation targets.
Analysts pointed out that the core driver of the euro’s appreciation is the weakening trend of the U.S. dollar. Since 2025, the rising U.S. debt burden, the fading premium of economic growth, uncertainties in tariff policies, coupled with U.S. President Trump’s indifference to the weakening U.S. dollar, have intensified the market’s sell-off of U.S. dollar assets and promoted the passive appreciation of the euro. In addition, market speculation about coordinated foreign exchange intervention by the United States and Japan has further accelerated investors’ withdrawal from the U.S. dollar, providing support for the euro.
For the export-oriented euro zone, the euro’s appreciation is not beneficial. German President Merz clearly stated that the weak U.S. dollar exchange rate has brought a considerable additional burden to Germany’s export economy, and German enterprises are facing the “double blow” of U.S. tariffs and the appreciation of their own currency. Goldman Sachs data shows that about 60% of the revenue of companies listed on the STOXX 600 Index comes from overseas, nearly half of which comes from the United States, and the euro’s appreciation has significantly squeezed corporate profit margins.
At the same time, the euro’s appreciation has also led the euro zone to face the risk of deflation. The European Central Bank (ECB) predicts that the euro zone’s inflation rate will drop to 1.9% and 1.8% in 2026 and 2027 respectively, below the 2% medium-term target. A number of ECB officials said they are closely monitoring the euro’s appreciation trend, and if the sustained appreciation squeezes inflation, they will not rule out taking countermeasures such as interest rate cuts. Currently, major financial institutions generally are bullish on the euro; Deutsche Bank and Goldman Sachs predict that the euro against the U.S. dollar may rise to 1.25 by the end of 2026.
