EUR/USD Rally Built on Shaky Ground Amid Dollar Weakness

The EUR/USD pair has been trading near 1.1740, but this strength is fragile and built on shaky ground. Despite reaching a three-month high, the euro's rally is largely driven by the dollar's weakness rather than any inherent strength of its own.

The catalyst for the dollar's decline was the US Treasury's announcement to double the size of its liquidity-support buyback operations for longer-dated government debt. This move increased the effective dollar supply reaching the system and led to a drop in long-term yields, which in turn weakened the dollar.

However, this rally is not sustainable as it lacks any real rate support. The 125-150 basis point rate gap between the US and Eurozone economies remains unchanged, and as long as this differential persists, carry will work against euro longs, making a sustained advance unlikely.