The U.S. dollar has demonstrated remarkable resilience, buoyed by robust inflation figures and a strong labor market. This economic strength has led to a recalibration of expectations regarding Federal Reserve (Fed) policy, with less anticipated monetary easing this year. Consequently, the dollar has surged to new highs, a trend that is expected to persist. Understanding these dynamics is crucial for anyone tracking the American Dollar To Euro exchange rate.
As Meera Chandan, Global FX Strategist at J.P. Morgan, noted, “Strength in U.S. activity has been a mainstay of our long-dollar bias, and the persistence of U.S. exceptionalism is a major FX theme.” This “U.S. exceptionalism,” characterized by a stronger economic performance compared to many other developed nations, has underpinned dollar strength. The anticipation that the Fed would begin easing monetary policy this year was widely held, but recent economic data has challenged this assumption. The market narrative has shifted from “when” the Fed will cut rates to “whether” they will cut rates at all this year, pushing the dollar higher against currencies like the euro. This shift directly impacts the American dollar to euro exchange rate, making the dollar more expensive relative to the euro.
However, the improving global economic landscape could potentially moderate the dollar’s upward trajectory when considering the dollar’s tendency to appreciate during periods of heightened risk aversion and vice versa. J.P. Morgan Research has increased the probability of a “high-for-long” soft landing scenario to 55%, suggesting a more optimistic outlook for global growth. Purchasing Managers’ Index (PMI) data further supports this, indicating a broadening and more inclusive global economic recovery. This global improvement can influence the American dollar to euro exchange rate by potentially weakening the dollar as risk appetite increases and investors move away from safe-haven assets like the USD.
Chandan further elaborated, “There have been several meaningful developments on this front of late, weighing on the dollar given its anti-cyclical properties. This may impede what otherwise looks like a potentially strong U.S.-led dollar environment, though we question whether it can fully offset ongoing U.S. exceptionalism.” This suggests that while global growth could act as a counterforce, the underlying strength of the U.S. economy might continue to support the dollar against the euro.
Commodity prices, particularly oil, are also re-emerging as a significant factor in the foreign exchange market. The commodity complex has risen nearly 7% from February lows, and Russia’s decision to reduce oil production could potentially drive Brent crude prices to $100 per barrel in the coming months. This surge in oil prices could indirectly benefit the dollar and thus influence the American dollar to euro exchange rate.
This potential dollar appreciation is partly due to its positive correlation with oil prices, especially during supply-driven events in energy markets. Since late 2022, the dollar has shown a tendency to move in lockstep with oil prices, particularly when supply disruptions fuel inflation while simultaneously pressuring economic growth. Such conditions typically favor dollar strength. According to Chandan, “The potential move to $100/bbl would therefore be dollar-positive through the interplay of the dollar’s anti-cyclicality, higher headline inflation and higher yields,” further impacting the American dollar to euro valuation.
The decreasing sensitivity of the dollar to commodity prices also reflects fundamental shifts in the U.S. balance of payments over the past two decades. The U.S. has significantly increased its domestic crude oil production to around 12 million barrels per day and drastically reduced oil imports. This transformation means that the U.S.’s net international energy needs are now neutral, and its trade deficit is no longer directly tied to fluctuations in energy imports. Consequently, energy price volatility no longer affects the U.S. balance of payments—and by extension, the dollar—in the same way it once did, providing further resilience to the dollar’s value against currencies like the euro.
Overall, the dollar appears well-positioned to withstand further increases in oil prices and maintain its strength. Chandan concludes, “We also continue to place strong emphasis on yields and the implications of higher-for-longer, and remain constructive on the USD,” reinforcing a positive outlook for the dollar and its continued strong standing in the American dollar to euro exchange rate.
