(Bloomberg) -- The euro’s surge is vindicating the handful of strategists who argued against calls for the single currency to fall to parity with the dollar.
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Morgan Stanley, Credit Agricole SA and Commerzbank AG are among the banks who defended the euro’s prospects, opposing a view in markets that was popular as recently as last month that it would soon slump to be worth only one dollar. Now it’s rallied over 4% this week alone to above $1.08, a turnaround after nearing $1.01 just a month ago.
“The big change this week is that the euro is finally back in the game,” said Michael Pfister, a currency strategist at Commerzbank. “The market has just moved a little faster in our direction than we expected, so it’s a small win.”
The euro’s jump puts it on track for the best weekly gain versus the greenback since 2020, following Germany’s and the European Union’s pledges to ramp up defense and infrastructure spending.
Hedge funds are now buying options that the currency could even hit $1.20 in six months’ time, whereas some investors were previously betting on it weakening below $0.95.
Plenty of others have been forced to capitulate to the currency’s about-turn. Banks including Goldman Sachs Group Inc. and Mitsubishi UFJ Financial Group Inc. have abandoned predictions that one euro will buy one dollar this year, which had been fueled by expectations the US would hit Europe with trade tariffs and that the interest-rate gap between the two would widen.
The strategists who stayed positive are not getting carried away now. Morgan Stanley at the start of the year saw the possibility of a jump to $1.08 — a move that has played out — while Commerzbank and Credit Agricole have been predicting $1.07 by the end of 2025.
There are plenty of reasons to bet on further gains. The euro extended its rally Thursday after the European Central Bank indicated its interest-rate cutting phase may be drawing to a close as inflation cools. That led money markets to trim wagers on further moves and they now favor less than two more cuts by year-end, a dynamic that could support the common currency.
“The euro is higher as the rates markets are once again forced to reassess their dovish outlook for the ECB,” said Valentin Marinov, Credit Agricole’s head of FX strategy, who now sees the possibility of it trading between $1.08 and $1.10 in the next six months.