Euro Slumps to 16-Month Low Amid Dollar Rally

The euro has reached a 16-month low after dropping 0.5% on Tuesday, putting it on track for its worst month since July 2025 with a 2.6% decline against the dollar in September.

Investors are favoring more Federal Reserve tightening to curb inflation, which is supporting the greenback. In contrast, while the European Central Bank is seen raising rates, many market participants believe the US economy can better absorb additional hikes than the eurozone.

'This is broad-based dollar strength on rising yields,' said Win Thin, chief economist at the Bank of Nassau 1982. Francesco Pesole, a currency strategist at ING Groep NV, labeled it a 'surprise dovish tilt,' and added, 'if one central bank hikes in October, it will be the Fed, and not the ECB.'

Options markets are leaning toward additional euro weakness, with longer-term positioning last week being the most bearish since March 2025. Morgan Stanley recently changed its stance, projecting a 3% drop in the common currency versus the dollar by mid-2027.