Euro Strength Marks Shifting Economic Tides at Year’s End

Euro’s Resilient Rally: The euro ended 2025 on a strong note, recovering from earlier lows to trade firmly above 1.1750 in the final sessions of the year. Despite thin holiday volumes and subdued volatility, the common currency has delivered one of its best annual performances in recent memory, appreciating more than 13% across the year.

Policy Divergence Shapes the Trend

The euro’s strength has been driven by diverging monetary policies between the European Central Bank and the U.S. Federal Reserve. While Europe maintained a supportive stance, the Fed’s cautious approach and internal divisions over rate cuts weighed heavily on the dollar. Trade tensions and signs of a slowing U.S. economy added further pressure.

Dollar’s Weakest Year in Nearly a Decade

The U.S. Dollar Index closed the year at 98.36, posting a modest daily gain but still down nearly 9% over the past twelve months. This marks the dollar’s weakest annual performance in close to a decade, reflecting the challenges of balancing inflation concerns with a deteriorating labor market.

Global Currency Dynamics

The euro’s rally has been broad-based, outperforming currencies such as the New Zealand dollar and holding firm against the yen and pound. With nearly one-third of all foreign exchange transactions involving the euro, its dominance in global markets has been reinforced through 2025.

Outlook for 2026

As the new year begins, investors will closely monitor U.S. jobless claims and inflation data for signs of economic strain. Policy divergence, trade uncertainty, and inflation debates are expected to remain central themes. The euro enters 2026 with momentum, while the dollar faces the challenge of regaining credibility after its steep annual decline.