Euro to Dollar Forecast: EUR/USD Rally Tests Dollar’s Safe-Haven Status

Modified: Monday, 26 January 2026 09:01 BST - Written by Frank Davies

STORY LINK Euro to Dollar Forecast: EUR/USD Rally Tests Dollar’s Safe-Haven Status

The Euro to Dollar exchange rate (EUR/USD) has rebounded sharply as renewed concerns over US policymaking, capital flows and Federal Reserve credibility undermine the Dollar, leaving banks divided on whether the move marks a turning point or a temporary dislocation.

EUR/USD Forecasts: Dollar fears return

After initial gains, Wells Fargo forecasts that the Euro to Dollar (EUR/USD) exchange rate will retreat to 1.15 by the second quarter of 2027.

Danske Bank, however, forecasts that EUR/USD will strengthen to 1.23 on a 12-month view as confidence in US assets falters.

EUR/USD dipped to lows below 1.16 early in the week amid fears over extra trade tariffs on European economies as Greenland tensions escalated.

Tensions eased during the Davos meetings and EUR/USD then rallied strongly to above 1.1750 as wider concerns over US policymaking undermined the dollar amid the risk of capital outflows from US markets.

There were reports that Trump’s rhetoric towards European countries would trigger institutional retreats from US assets.

According to Danske Bank; “Over the medium term, we maintain our outlook for EUR/USD to trend higher, underpinned by narrowing real rate differentials, a recovering European asset market, reduced global demand for restrictive monetary policy, persistent tailwinds from hedge ratio adjustments, and fading confidence in US institutions.”

Credit Agricole notes weak dollar confidence and evidence of capital outflows; “This interpretation was further lent credence by US President Donald Trump, who threatened yesterday to retaliate if European investors pull out of the US.”

Deutsche Bank noted the lack of alternatives; “Disengagement with US led economic networks is consistent with finding alternatives to the dollar. But this is not easy. While the official sector is divesting from dollar assets to some extent, it is much harder for the private sector to find alternatives to deep and liquid US capital markets.”

Fed policy and the choice of next Fed chair will also be key elements.

Wells Fargo expects further Fed rate cuts in the first half of the year will trigger further net dollar losses.

The bank also addressed the wider dollar outlook; “while we are steadfast in our view that the Federal Reserve is and will remain an independent institution, broader financial market concerns around the credibility of the U.S. central bank may also add to a weaker dollar over the coming months.”

It added; “In the near term, dollar depreciation should be broad-based, and experienced against G10 and emerging markets currencies, with only limited exceptions.”

Wells Fargo expects a medium-term dollar recovery; “Longer term, we believe the dollar rebound can be a product of the Fed ending its rate cutting cycle. In our view, once the Fed ends its easing cycle at the June meeting, capital flows will flow back to the U.S. dollar as nominal yields are set to be among some of the highest in the G10.”

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TAGS: Euro Dollar Forecasts