Is the Dollar Stronger Than the Euro? Market Dynamics Shift Amid Geopolitical Easing and Policy Divergence

The currency landscape shifted notably this week as the dollar retreated while the euro strengthened, raising questions about underlying structural changes in global monetary policy and risk sentiment. The answer to whether the dollar remains stronger than the euro is increasingly complex, with both cyclical and structural factors reshaping traditional hierarchies in foreign exchange markets.

Geopolitical Easing Reshapes Currency Risk Premium

President Trump’s decision to de-escalate tensions with European nations over the Greenland acquisition attempt has fundamentally altered near-term currency dynamics. By announcing a framework agreement with NATO and confirming that tariffs would not be imposed on European nations opposing his territorial ambitions, Trump lifted a critical overhang that had supported safe-haven demand for traditional reserve currencies.

This geopolitical recalibration proved immediately visible in currency markets. The EUR/USD exchange rate advanced by +0.54% during the trading session, breaking higher as dollar weakness and euro strength combined to drive the pair toward fresh levels. The removal of trade policy uncertainty simultaneously benefited risk appetite, with equities rallying +1.7% in the Nikkei while treasury yields adjusted to reflect reduced geopolitical premiums embedded in pricing.

The yen’s performance illustrated this dynamic vividly. USD/JPY edged higher by just +0.07%, restrained by safe-haven demand evaporating as tensions eased. Japanese assets attracted less defensive positioning, allowing the yen to stabilize despite broad dollar softness. Meanwhile, the dollar index (DXY) declined by -0.42%, reflecting broad-based weakness across the currency complex as equity strength reduced conventional liquidity demand for greenback positioning.

Economic Data and Central Bank Policy Divergence: The Deeper Challenge to Dollar Strength

Beneath the surface of day-to-day currency fluctuations lies a more fundamental challenge to dollar strength relative to the euro: diverging monetary policy expectations and central bank guidance. The data this week illustrated the complexity.

On the positive side for the dollar, US economic indicators proved resilient. Weekly initial unemployment claims rose only +1,000 to 200,000—coming in well below expectations of 209,000—while Q3 GDP received an upward revision to 4.4% on an annualized, quarter-over-quarter basis, exceeding expectations for an unchanged 4.3%. November personal spending advanced +0.5% month-over-month in line with forecasts, and the November core PCE inflation gauge—the Federal Reserve’s preferred price measure—climbed +0.2% month-over-month and +2.8% year-over-year, exactly meeting expectations.

Yet this economic strength provides limited offset to the dollar’s underlying headwinds. Markets are pricing near-zero probability of rate hikes and instead discounting approximately -50 basis points of Fed rate cuts across 2026 as investors anticipate monetary accommodation. By contrast, the ECB is expected to hold rates steady throughout 2026, while the BOJ is poised to deliver an additional +25 basis points of tightening. This interest rate differential—with US rates moving lower while other major central banks hold or tighten—systematically pressures the dollar’s valuation.

The Federal Reserve’s own actions compound this challenge. By initiating a $40 billion monthly liquidity injection into financial system through Treasury bill purchases beginning in mid-December, the Fed has inadvertently signaled monetary accommodation at precisely the moment markets are reconsidering terminal rate levels. Speculation that President Trump intends to appoint a dovish Federal Reserve Chair—with an announcement promised within weeks—adds additional pressure to dollar positioning by suggesting an extended period of policy ease lies ahead.

Euro Strength Emerges from Improved Sentiment and Policy Anchoring

The euro’s outperformance against the dollar reflects both reduced negative catalysts and positive momentum shifts. Beyond the geopolitical tailwind from Greenland tensions easing, eurozone confidence data proved uplifting. The January consumer confidence index for the eurozone surged to an 11-month high of -12.4, climbing +0.8 from prior readings and significantly exceeding expectations for -13.0. This improvement in sentiment, while still negative in absolute terms, signals an inflection in European economic psychology.

More critically, the ECB has anchored market expectations at zero probability of any rate hike at the February 5 policy meeting, removing uncertainty that had previously weighed on euro positioning. With the ECB likely to maintain a steady policy course while the Fed transitions toward accommodation, relative value favors euro accumulation over continued dollar allocation. Swaps are pricing the ECB rate decision with complete conviction: a 0% chance of policy tightening.

Precious Metals Rally as Dollar Weakness Accelerates Safe-Haven Demand Inversion

The weakness in the dollar has catalyzed a powerful rally in precious metals, with February COMEX gold settling +75.90 (+1.57%) while March COMEX silver climbed +3.735 (+4.03%). Both contracts posted fresh all-time and new contract highs, with spot gold reaching $4,908.80 per ounce and silver touching $95.98 per troy ounce.

Multiple structural forces support continued strength in precious metals despite reduced geopolitical tensions. Goldman Sachs raised its year-end gold price target to $5,400 from $4,900, citing intensifying demand from private investors and accelerating central bank accumulation. China’s People’s Bank of China expanded its gold reserves by +30,000 ounces to 74.15 million troy ounces in December—extending the streak to 14 consecutive months of reserve increases. The World Gold Council reported that global central banks collectively purchased 220 metric tons of gold during Q3, up +28% from Q2 purchasing activity.

Long positioning in gold ETFs climbed to a 3.25-year high on Monday, while silver ETF holdings reached a 3.5-year high on December 23, reflecting broad-based institutional accumulation. The upside revision to Q3 US GDP provided additional support for industrial metals and silver prices by signaling economic resilience, even as silver benefited from President Trump’s commitment to avoid European tariffs—a positive input for manufacturing-dependent economic growth.

Concerns about Japan’s expansionary fiscal policy persisting through snap elections and potential LDP parliamentary majority have boosted precious metals as stores of value amid elevated sovereign debt trajectories. Additionally, expectations of extended Federal Reserve accommodation—driven by dovish Fed Chair speculation—consistently pressure the dollar while simultaneously supporting real asset positioning.

Looking Forward: Structural Dollar Weakness vs. Cyclical Euro Strength

The question of whether the dollar remains stronger than the euro cannot be answered by short-term trading moves alone. Yes, the dollar retains reserve currency status and substantial market liquidity advantages. Yet the structural framework has shifted. Monetary policy divergence, expectations of Fed accommodation, and geopolitical risk repricing all conspire to pressurize traditional dollar support mechanisms. The euro, anchored by an ECB willing to defend current rate levels and benefiting from reduced trade policy uncertainty, offers improving relative value on a forward-looking basis.

Currency relationships are not permanently determined—they reflect constantly evolving interest rate differentials, growth expectations, and risk sentiment. This week’s moves suggest that structural factors increasingly favor euro strength against a dollar grappling with accommodation expectations and reduced safe-haven demand amid improving global sentiment.