Euro Climbs to Multi-Week Highs as a Softer Dollar and Dovish Fed Shift the Balance

The euro extended its rally against the US dollar on Monday, climbing to its strongest levels in weeks as the greenback remained under pressure following the Federal Reserve’s recent interest rate cut. The EUR/USD pair hovered near 1.1760, marking its highest point since early October, supported by a growing belief that US monetary policy may ease more quickly than previously expected.

The dollar’s weakness reflects the aftermath of the Fed’s 25-basis-point rate reduction and a broader reassessment of the central bank’s outlook. The US Dollar Index, which measures the currency against a basket of major peers, slipped close to a two-month low, underscoring fading demand for the greenback as investors digest a more cautious Fed stance.

Adding to the pressure, dovish comments from a senior Federal Reserve official reinforced expectations that policy may still be restrictive. He argued that underlying inflation is already close to the Fed’s 2% target once delayed components are stripped out, warning that keeping rates too high for too long could unnecessarily slow the economy. According to this view, stubborn shelter inflation reflects past imbalances rather than current conditions, strengthening the case for a faster move toward a neutral policy setting.

Recent US economic data has also weighed on sentiment. Manufacturing activity in New York state showed a sharp slowdown in December, with the latest survey swinging into contraction territory and falling well short of market expectations. The weak reading added to concerns that higher borrowing costs are taking a toll on economic momentum.

Investors are now looking ahead to a pivotal week of US data that could further shape expectations for monetary policy into 2026. The focus will be on the delayed October and November employment report, followed by the release of inflation figures later in the week. Together, these indicators are expected to play a decisive role in confirming whether the Fed is likely to continue easing in the months ahead.

In contrast, the eurozone calendar has been relatively quiet. One bright spot came from industrial production, which posted a stronger-than-expected monthly increase in October, suggesting some resilience in the bloc’s manufacturing sector. Attention will soon shift to business sentiment surveys and the European Central Bank’s upcoming policy meeting, where officials are widely expected to leave interest rates unchanged.

With the ECB likely to stay on hold and markets increasingly pricing in a softer Fed trajectory, the euro continues to benefit from the shifting policy divergence. Unless upcoming US data significantly alters expectations, the balance of risks appears tilted in favor of further gains for EUR/USD in the near term.