Beware Euro-Dollar's Turn Warns Rabobank
- Written by: Gary Howes
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Rabobank is flagging a turn higher in the dollar, with the early-2025 slide being unwound.
In a new note, the bank notes the dollar's rebound is gathering some steam following the hefty losses at the start of the year:
The USD is "currently the best performing G10 currency both on a one-month view and in the month to date," and Rabobank notes it is "the third best performer amongst its peers in the half year to date."
The earlier slump still leaves the USD "the weakest performing G10 currency in the year to date," but that weakness is precisely why the bounce has room to run.
The bank pins the near-term dollar strength on positioning and a squeeze rather than a sudden macro shift:
"In line with our view the USD has recently benefitted from a short squeeze, we maintain our forecast of EUR/USD1.16 on a 1-to-3-month view."
In other words, traders who were leaning against the dollar have been forced to buy it back as the narrative has swung, and Rabobank expects that unwind to push EUR/USD lower toward 1.16.
The market may have run ahead of itself in discounting policy easing, which limits additional downside for the USD and can catalyse further upside if data beat expectations.
Rabobank says "there is a lot of Fed easing already priced into the USD," with "market implied rates looking for 120 bps of easing on a 1-year view."
Because so much easing is 'in the price', a more resilient US growth or productivity pulse could surprise the market in a dollar-positive way.
"Upside risk for the USD could come from better-than-expected U.S. economic data on the growth and productivity fronts or from an increase in perceived risk regarding price pressures stemming from tariff polices. This could extend the recent position adjustment in favour of the USD," says Rabobank.
Positioning outside the US also matters. Rabobank highlights that "market positioning is still long EURs and we see an ongoing risk that EUR bulls may be facing disappointment."
That set-up can amplify a stronger-USD move if euro longs are forced to reduce exposure as the data and price action break against them.
The structural angle also supports a firmer dollar than the zeitgeist sometimes implies.
Analysts acknowledge European ambitions to deepen capital markets, yet this underlines the USD's incumbency advantages.
Europe may make progress, but the United States still benefits from "very deep capital markets and its hard power," which helps sustain the dollar's global transactional and reserve roles.
That backdrop makes the early-year plunge look more like a positioning event than a secular shift.
Put together, Rabobank’s message is that the pendulum has swung back in the dollar’s favour for now. The bank even floats that the turn has begun already, writing, “it is possible that the USD has already started the process of turning vs. the EUR.”
Rabobank will be reviewing its EUR/USD forecasts, which pins 1.21 to the board for Q2 2026.
