Euro-Dollar Forecasts Raised at Nordea

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A major European bank has cut its Euro to Dollar exchange rate forecasts, citing USD trust issues.

It's not the first bank to warn that trust in the U.S. Dollar has taken a hit, resulting in the currency decoupling from its traditional fundamental drivers.

"In the process of ramping up and down tariff rates, the trust in the US as an investment destination and business partner has eroded, something that is visible in the value of the dollar," says Lars Mouland, an analyst at Nordea Bank, in a bank detailing new downgrades for the Greenback.

"Along with the weakening of the USD, EURUSD basis has moved lower. This suggests that in addition to selling US assets, international investors have started to increase their fx hedges on dollar assets," he explains.

Until the start of this year foreign investors could often get away with unhedged U.S. investments as the Dollar tended to rise no matter the weather, meaning their investments enjoyed supportive currency tailwinds.

However, in 2025, U.S. assets and the Dollar have tended to fall in tandem, meaning unhedged investments saw losses mount.

As investors build hedges, Dollars must be sold.

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But beyond the technicals, trust in the USD has taken a hit, which won't be reversed anytime soon, paving the way for ongoing underperformance.

"Even it the US were to try to repair the damage to foreign relations, it will take time. We therefore believe the dollar will continue to weaken as investors take a more cautious stance on US assets and hedge a larger portion of what they already own," says Mouland.

He explains that foreign investors will look elsewhere to invest, even if there are still no good alternatives to a dollar-centric financial market.

Nordea raises its three-month Euro-Dollar forecast to 1.12 from 1.10, with year-end moving from 1.12 to 1.14.

Earlier this week, we reported on new research from HSBC that warned a "distrust of the USD" has built in 2025, and will leave it "in a soft position over the coming quarters."

HSBC analysts say that although the U.S. Dollar has stabilised recently, "it remains in a weaker state overall because a sense of unease persists."

"This is very different to earlier this year when the DXY traded at a meaningful premium versus its relationship with the interest rate differential. More recently, it suggests the DXY should be closer to 104 but we can also understand why this cyclical influence is not working. It is very possible the DXY's weakness is saying something else, including a belief that the Fed may need to cut more than what is currently priced or other forces are having a greater role. It represents a lack of trust," notes HSBC.