Outlook for the euro and dollar
15 OCT, 2025
By Claudio Wewel from J. Safra Sarasin
By Claudio Wewel, Currency Strategist at J. Safra Sarasin Sustainable AM
Euro
Limited short-term upside potential. Structural forces and fiscal spending should provide support heading into 2026.
The euro benefited from the “Sell America” movement following the announcement of “reciprocal tariffs” in the first half of 2025. Economic confidence indicators in the eurozone have improved thanks to German fiscal packages focused on infrastructure and defense investment, although growth in the region remains stagnant. Therefore, a significant improvement in eurozone economic activity will be necessary for the euro to make substantial gains from current levels.
Germany’s historic infrastructure investment package—debt-financed and valued at €500 billion—set to be implemented over the next twelve years, along with a notable increase in defense spending, strengthens the medium-term growth outlook for both Germany and the broader eurozone. We expect the positive effects on activity to start becoming visible in 2026, which should allow the euro to begin a new upward phase.
In the medium term, the euro should also benefit from the return of financial flows from the United States to the eurozone as U.S. growth moderates. Moreover, structural dollar selling is likely to remain a positive factor for the European currency. However, a renewed increase in risk premiums on the eurozone periphery, stemming from the political crisis in France, represents a downside risk.
In the long term, the euro should benefit from an increase in allocations to reserve assets denominated in euros.
Dolar
The dollar faces headwinds as interest rate advantages narrow and political uncertainty in the U.S. remains high.
The dollar has traded within a relatively narrow range in recent months as markets reassess the Trump Administration’s policies and U.S. growth prospects. Although macroeconomic data have remained solid, the U.S. labor market showed signs of weakness in September, prompting the Federal Reserve to implement a precautionary rate cut. In this context, we maintain a cautious stance on the dollar, as the balance of risks tilts toward a further slowdown in economic activity. Tariff increases and the dollar’s depreciation are likely to push prices higher and weigh on domestic consumption.
Market-implied interest rate expectations suggest that the U.S. monetary policy advantage vs. other G10 economies will diminish, which is a negative factor for the dollar. Unsustainable policies and high political uncertainty could trigger additional capital outflows. Moreover, the Trump Administration’s plans to make dollar-denominated reserve assets less attractive pose another downside risk. However, a significant policy shift that restores confidence in U.S. assets would be an upside risk.
In the long term, the combination of political uncertainty and persistent external financing needs represents a structural obstacle for the dollar. Consequently, most G10 currencies and commodity-linked emerging market currencies should continue to gain ground against an overvalued dollar.
