The dollar has fallen to its lowest level in 3.5 years. How are currency traders reacting?

The dollar fell to its lowest level in three and a half years, forcing currency traders to increase bets on the growth of competing currencies. Now the focus of their attention is the euro. The European currency is edging ever closer to breaking through the landmark $1.20 level.

By June 27, the dollar had fallen to its lowest level in three and a half years and was close to ending the week with a 1.4% drop, the biggest decline in a month, reports Reuters. The U.S. currency has already lost more than 10% since the beginning of the year. If the momentum continues in the coming days, it will be the biggest drop in the first half of the year since the era of floating exchange rates began in the 1970s, the agency expects.

Meanwhile, the euro has risen to its highest level in more than three years - almost to $1.17 on the back of the weakening dollar. Traders are increasingly betting on euro call options, the price of which is growing along with the currency rate. According to data from Bloomberg, the volume of deals focused on breaking through the $1.20 level - the euro hasn't been this expensive since June 2021 - has risen sharply over the past week.

Over the past month, the euro has strengthened against almost all Group of Ten (G-10) currencies and is now trading near a decade high against the Chinese yuan. An additional catalyst for traders may be a speech by European Central Bank President Christine Lagarde in Portugal next week, notes Bloomberg.

For the last two days, the markets have been discussing the risks of an early change of the Fed chief - after The Wall Street Journal reported that US President Donald Trump was allegedly seriously considering the idea of replacing Fed Chairman Jerome Powell and announcing his successor as early as September-October. This news weakened the already depreciating dollar even more, as market participants began to fear undermining the Fed's independence and began to put additional interest rate cuts in the U.S. in 2025 into prices.

«Trump's desire to keep the Fed in check by replacing Jay Powell is not the best way to reinforce perceptions of the integrity and independence of U.S. economic policy, and with it the dollar's status as the world's reserve currency,» emphasized Macquarie currency and interest rate strategist Thierry Wiseman.

According to in the words of Antonio Ruggiero, a strategist at currency and global payments specialist firm Convera, «the dollar's short-term support, driven by geopolitical tensions and its traditional status as a safe haven currency, is almost complete Ruggiero added that «the euro will continue to benefit from continued pessimism about the dollar.»

Some analysts, however, are urging caution, warning of risks to the euro's slowdown. The short-term fair value of the euro-dollar pair has risen sharply, said ING strategist Francesco Pezole. «For the [euro] exchange rate to reach $1.20, something has to happen with duties, trejeris or Fed policy,» he pointed out.

This article was AI-translated and verified by a human editor