FX Outlook 2025: Dimming Dollar, Rising Euro (and Other Dynamics) in a Policy-Divergent World

Currency markets are increasingly reflecting policy divergence, global growth anxieties and the implications of narrower U.S. dominance. According to a recent survey by Reuters, FX strategists expect the U.S. dollar (USD) to continue weakening through November as markets price multiple rate cuts by the Federal Reserve. Meanwhile, EUR/USD forecasts point toward 1.20+ for the euro by end-2025 or early-2026.

The FX backdrop is shaped by: central-bank divergence (Fed vs ECB/BoE/others), growth/inflation differentials, carry trades, and structural currency flows (reserve status, de-dollarisation themes). Key Thematic Drivers:

1. U.S. dollar weakening. With U.S. growth prospects softening and rate-cut expectation increasing, the USD is under pressure. JPMorgan cites a fall in U.S. consensus growth from 2.3% to roughly 1.4% earlier this year as part of the narrative.

2. Euro and other currencies gaining. The Euro (EUR) is benefitting from improved fiscal-monetary coherence in the euro area and the weaker USD backdrop. Forecasts toward 1.20+ reflect this shift.

3. Policy divergence & yield behaviour. Carry trades will favour currencies tied to higher or stable interest rates; currencies of central banks likely to cut earlier may suffer.

4. Structural currency flows and reserve composition. While full-scale de-dollarisation is exaggerated, there is evidence that investors and some institutions are hedging USD exposure, which may lend longer-term tailwind to non-USD currencies.

5. Risk-off / risk-on flips in FX. In periods of global shock, currencies of small open markets, commodity-linked currencies and funding-carry currencies will remain sensitive to swings.
   

Strategies & Positioning Implications:

• Build long EUR/USD exposure selectively (via spot, options) with attention to 1.20+ as a key target zone.

• Consider short USD/JPY or short USD/CAD in funding-carry or dollar-roll-down trades, but hedge geopolitical risk.

• For emerging-market currencies, differentiate: those with sound fundamentals (rate cuts timed, reasonable FX reserves) vs high-vulnerability currencies.

• Use currency hedges for global equity exposures given likely stronger non-USD returns for unhedged portfolios.
  

Key Takeaways:

• FX markets are favouring a weaker USD, with strategists positioning accordingly.

• EUR looks poised for upward leg toward ~1.20+ against the USD in 2025-26.

• Policy divergence remains the dominant FX driver: where central banks hold or raise vs cut will matter.

• Structural flows (reserve diversification, hedging) give non-USD currencies incremental tailwind.

• FX remains a high-volatility domain in this era of shifting trade/geo risk; hedge wisely.