Euro Bolstered by Hunger for European Stocks
- Written by: Gary Howes
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The euro could see further upside as a rotation into European assets continues apace.
According to Bank of America's latest Global Fund Manager Survey, global fund managers continue to ramp up exposure to European assets, and there is little indication of an imminent shift in fortunes.
The July survey shows the highest overweight position in eurozone equities since July 2021, with a net 41% overweight, up from just 1% at the start of the year.
The euro itself saw the most bullish positioning since January 2005, with net 20% of fund managers overweight the currency.
This represents a bullish reversal in fortunes from the 18% underweight stance in January.
"The reasons for optimism on EUR are well known. Investors see the fiscal tailwind as a primary driver," says Elsa Lignos, Global Head of FX Strategy at RBC Capital Markets.
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The euro is meanwhile considered undervalued by 31% of fund managers, while the U.S. dollar is seen as overvalued by 47%.
"Short U.S. dollar" was identified as the most crowded trade for the first time in the survey's history, something to keep in mind for the short-term as extremes in positioning can be considered a contrarian indicator that a reversal is imminent.
Nevertheless, strong demand for hedges against a weaker U.S. Dollar could limit the Dollar's ability to rebound, further entrenching the advance in the Euro-to-Dollar exchange rate towards 1.20.
The proportion of fund managers looking to increase hedges against a depreciating dollar reached 33% in July, down slightly from 39% in June, while 41% said they are not planning any changes to their FX hedge ratios.
"If European investors continue to increase FX hedge ratios, it will likely provide further support to EUR-USD," says Clyde Wardle, Senior EM FX Strategist at HSBC, adding that the behaviour of Dutch pension funds often signals broader euro area investment trends.
The moves come amid a broader increase in risk appetite, with investors showing renewed optimism about economic growth, earnings, and global market stability.
A net 59% of survey respondents said they believe a recession is unlikely, while 65% expect a "soft landing" for the global economy.
Investor positioning reflects a rotation out of cash and defensive sectors and into equities, particularly in Europe and technology.
The survey found the largest three-month rise in eurozone equity allocation in over four years, alongside a record surge in appetite for risk-taking.
Cash levels fell to 3.9%, triggering BofA's contrarian "sell" signal, which historically precedes near-term equity weakness but also confirms strong risk-on sentiment.
Despite the bullish sentiment, BofA strategists noted that positioning is not yet extreme, and volatility remains low — suggesting there may still be room for further euro appreciation if current trends persist.
The July survey included responses from 211 fund managers overseeing a combined $504 billion in assets between July 3 and July 10.
