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The euro and sterling hit more than four-year highs against the US dollar on Tuesday, as improving investor sentiment towards Europe and the UK combined with fears of further weakness in the greenback.
The euro rose as much as 0.8 per cent to $1.197, its highest level since June 2021. Sterling also rose 0.8 per cent, to $1.379, its highest point since October 2021, before paring some gains.
Better than expected economic data from Germany and easing concerns over fiscal risks in France helped to boost the euro, while sterling also gained from improving data.
The brighter signs from Europe combined with the dollar’s big sell-off over the past week, sparked by jitters over erratic US policymaking.
“We saw in the past few days that if there is some flight away from the dollar . . . the euro is definitely up there to benefit from it,” said Francesco Pesole, FX strategist at ING, adding that US President Donald Trump’s “unpredictable” policy over Greenland had reignited the “sell America” theme.
Analysts at MUFG said the euro was “benefiting from its role as the anti-dollar”, as worries swirl over US policymaking.
The dollar index, which measures the value of the greenback against six other major currencies, has fallen 2 per cent so far in January and is trading around a four-month low.
Several issues are weighing on the US currency, including worries about a potential US government shutdown, sharp moves in the yen driven by speculation over joint US intervention with Japan, rumours about the White House’s pick for chair of the Federal Reserve and ongoing geopolitical tensions between the US and its Nato allies — which came to a head last week over Trump’s demands to take over Greenland.
The Greenland episode revived negativity towards the dollar initially sparked by Trump’s “liberation day” tariff blitz last April, said Lefteris Farmakis, senior FX strategist at Barclays.
“The upending of the post-World War II order is a long-term negative for the dollar,” he said, as it encourages investors to move out of dollar-denominated assets or to hedge their dollar exposure.
Meanwhile, economic and political developments across the Atlantic have allowed investors to turn more positive on the euro and sterling.
Recent economic data from Germany, the Eurozone’s biggest economy, has buoyed sentiment among some investors, said Constantin Bolz, head of G10 FX strategy at UBS Global Wealth Management.
Berlin’s announcement of a fiscal stimulus package last spring prompted a jump higher in the euro, although the currency has largely flatlined since then as investors questioned whether the money would materialise.
But recent data showed that Germany’s economy grew 0.2 per cent in 2025 — its first positive reading since 2022 — while a closely watched measure of activity in the construction sector rose in January to its highest since 2022. A broader measure of economic sentiment in the country is at its highest level since 2021.
“Over the last few weeks, we could see the first hard data showing [an economic] recovery,” Bolz said. “Europe hasn’t grown for the last 15 years. If this fiscal spending really lifts growth, that should be supportive [for the euro].”
French political instability, which weighed on the euro last year, has also eased after the government last week survived two no-confidence votes over its budget plans. Over the past week, the spread between French and German 10-year borrowing costs has shrunk from 0.67 percentage points to 0.57 percentage points.
In the UK, stronger economic data has combined with a “post-Budget bounce in sentiment” in recent weeks to support the pound, said Farmakis at Barclays. This month, traders have pushed back their bets on the next Bank of England rate cut from June to July.
However, Farmakis added that lingering political uncertainty in the UK was preventing the pound from rising further.
“When the dollar drops in such a broad-based way, typically you would have seen a bit more strength in the pound,” he said. “I think the fact that you still have this noise around Andy Burnham is holding sterling back a bit.”
Burnham, the mayor of Greater Manchester who is seen as a potential future leader of the ruling Labour Party, was blocked at the weekend from running in a crucial by-election next month, sparking fierce divisions within the party.
