Photographer: Alain ROLLAND. Copyright: © European Union 2025 - Source: EP.
The euro is set to stay under pressure against the dollar while investors use European stocks, and not the single currency, to hedge a US-led AI correction.
The euro fell to a fresh 2026 low against the dollar on Wednesday, while European stocks hold up as a hedge against the AI selloff, says Citi's FX desk.
"The rotation from an AI-exposed US to Europe has purely been an equities story so far. EURUSD has been frustratingly rangebound, with the latest CPI print seeing the pair trade towards lows of 1.11," says Varshi Karamsetty of Citi's FX desk, in a new FX market commentary from the U.S. bank.
"Europe has found an unlikely advantage in the AI selloff. Its sector mix means that it provides a natural hedge in a US-led AI correction," Karamsetty adds.
Technology stocks make up 3.62% of the Stoxx 600's market value, against 30.58% of the S&P 500, and the S&P 500 has fallen around 2.5% since last Wednesday as the Euro Stoxx Banks index rose 4.6%.
The euro-to-dollar exchange rate peaked at 1.1273 on 4 November after the U.S. midterm elections and has since fallen 1.6% to 1.1089, beneath the previous 2026 low of 1.1105 set on 29 October.
The latest leg lower followed U.S. inflation figures showing consumer prices rose 0.4% in October against a 0.3% consensus, putting a December Federal Reserve hike beyond doubt.
Goldman Sachs finds the euro behaving procyclically this year, falling with risk assets, "helped by fragilities on the energy and sovereign credit fronts."
When the Nasdaq 100 slumped 6.4% on 5 November, the yen and Swiss franc led currency markets and the dollar gained, as Pound Sterling Live reported.
"Being tactically bearish EURUSD makes sense, but a break of 1.10 seems unlikely," says Citi's Karamsetty, adding that positions are "cleaner but conviction is fickle given recent volatility."
That leaves the euro around 0.8% above the floor Citi's desk expects to hold.
Commerzbank sees EUR/USD trading broadly sideways for as long as markets expect both the Fed and the European Central Bank to raise rates in December, and Citi calls an ECB hike its "strong base case".
France's fiscal troubles keep a risk premium on the euro that limits its rebounds, and the pound has held its ground against the single currency, with the pound-to-euro exchange rate at 1.1971, close to its 30 October peak of 1.2016.
The euro needs the rotation into European stocks to spill over into the currency before it can recover, and a daily close beneath 1.10 would test Citi's call.
