Euro-Dollar's Temporary Setback Deepens

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The Euro extends losses, but Dollar weakness is tipped to ultimately resume.

Foreign exchange markets are seeing the temporary Dollar rebound grow in strength, with further gains likely in the coming days and weeks before the longer-term trend of depreciation resumes.

"The thaw in the tariff war and rally in stocks and tighter credit spreads that is tempting investors to reverse FX tactics and trim short dollar positions. The greenback gained this week vs all G10 and most EM currencies," says Kenneth Broux, a strategist at Société Générale.

The USD rebound leaves the Euro to Dollar exchange rate on the cusp of a third weekly decline, albeit the pullback remains relatively shallow when compared to the notable weakness that characterised the opening months of 2025.

"EUR/USD violated trendline support around 1.1265 and buyers would previously would have stepped in," says Broux.

A lack of buying interest at this level creates scope for further near-term declines.

"A downside break would be expected to find support in the mid-1.11s," says Shaun Osborne, Chief FX Strategist at Scotiabank.

Gains for the Dollar extended after the U.S. and UK reached a trade accord that confirmed to markets that the U.S. is ready to negotiate the worst excesses of the April 02 tariffs away.

Above: The EUR/USD setback deepens.

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U.S. import tariffs risk slowing U.S. economic growth, which dents the attractiveness of U.S. assets with foreign investors.

Efforts to mitigate these tariffs with a new set of trade agreements will, therefore, benefit the USD.

In this vein, Monday's trade in Euro-Dollar should reflect the outcome of trade talks between the U.S. and China in Switzerland.

"Attention turns to tomorrow’s discussions between U.S. and China on tariffs and the market open on Monday," says Broux.

U.S. Treasury Secretary Scott Bessent and Chief Trade Negotiator Jamieson Greer will meet China's economic chief, He Lifeng, in Switzerland.

"My sense is this will be about de-escalation," Bessent said in a televised interview following the announcement of talks. "We’ve got to de-escalate before we can move forward."

Despite progress, the USD's rebound has been relatively shallow and it is becoming clear that too much has changed in 2025 for investors to fully back the U.S. exceptionalist trade again., exposing the USD to further softness.

Above: The Dollar index (DXY). "Objectively, we maintain our view that the USD will continue to weaken against the Majors. This will result in the USD Index (DXY) entering a new trading range below 100 and falling further towards 96.9 by 1Q26." - UOB.

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Peter Chia, Senior FX Strategist at United Overseas Bank (UOB) in Singapore, says the most likely reason behind the USD's sell-off in April, which included a dramatic plunge against the Taiwan Dollar, was likely due to the concentrated unwinding of large amounts of USD from exporters who had previously held onto their USD trade proceeds.

"Objectively, we maintain our view that the USD will continue to weaken against the Majors," says Chia.

David S. Adams, lead FX strategist at Morgan Stanley, says his team maintains a bearish stance on the Dollar as the U.S. yield curve bull-steepens and investors continue to hedge U.S. investments.

Foreign investors in U.S. assets entered 2025 largely unhedged as they anticipated further Dollar strength under the second Trump regime that was expected to extend a period of U.S. economic and financial exceptionalism.

However, U.S. stocks and the Dollar have fallen sharply under fears that tariffs would undermine economic growth.

For unhedged foreign investors, this means losses from stock market losses were amplified by the falling Dollar.

As investors build hedges, more Dollars must be sold.

"We are bearish on the DXY as the US yield curve bull-steepens and investors continue to hedge US investments," says Adams.