The euro delivered a standout performance in foreign exchange markets in 2025, proving once again that when a currency becomes excessively out of favor, it does not take much to trigger a powerful rebound.
The single currency finished the year as the strongest performer among G10 peers, rising 13.3% against the US dollar. It was followed by the Swiss franc, while the Australian dollar and the British pound ranked third and fourth, each gaining roughly 7.5%. In contrast, the US dollar ended the year as the weakest major currency.
From deeply unloved to market leader
A critical factor behind the euro’s surge was its extremely weak starting position. The currency ended 2024 near 1.02 against the dollar, marking its lowest annual close on record and the weakest level since a brief dip in 2022. This reflected years of underwhelming economic growth and persistent investor skepticism toward the eurozone outlook.
That pessimism began to unwind in 2025 as fiscal policy across Europe shifted meaningfully. Under mounting geopolitical pressure from Russia and renewed political tension with the United States under President Donald Trump, European leaders moved away from rigid fiscal restraint. Germany, in particular, adopted a more pragmatic stance, reassessing policy priorities amid external security risks, competitive pressure from China’s manufacturing sector, and rising domestic political challenges.
Policy realism supports confidence and capital inflows
Internally, the rise of the AfD contributed to political soul-searching, prompting a broader retreat from ideologically driven decision-making. This included reassessing policies such as the shutdown of nuclear power plants, which had weighed on energy security and industrial competitiveness.
Elsewhere in the euro area, economic performance showed notable bright spots. Spain outperformed expectations, helping propel the IBEX index to a remarkable 49% rally, making it one of the best-performing major equity benchmarks globally and reinforcing the broader improvement in investor sentiment toward Europe.
The return of realpolitik to European policymaking has been welcomed by markets, as it has refocused attention on growth-oriented strategies. Combined with historically low asset valuations, this shift has attracted capital inflows and helped lift the euro toward the 1.17 level, which still remains relatively subdued by longer-term standards.
ECB policy outlook keeps upside potential alive
Looking ahead, the European Central Bank could provide a further foundation for euro strength. Markets increasingly believe the ECB eased policy early and decisively, a move that may begin to support economic activity in 2026. Expectations now suggest the rate-cutting cycle is nearing its end, and any sustained improvement in growth could quickly reignite discussions around future rate hikes.
While Europe is still far from becoming a highly dynamic economic region, policymakers appear to be focusing on more constructive priorities. That shift has earned a degree of market confidence, at least for now. The next challenge lies in execution, as investors look for tangible follow-through to justify the euro’s impressive comeback.
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