The euro held near a three-month high against the dollar on Monday, with EUR/USD last trading at 1.1682, up 0.02% on the day and marking the highest level in three months. The pair has oscillated between 1.1670 and 1.1690 during Monday’s session, with the dollar failing to recover ground across major timeframes.
Over the past month, EUR/USD has strengthened by 2.76%, extending gains of 1.15% in August after a 1.02% rise in July. Year-to-date, the pair remains 0.58% lower despite the recent rally, having recovered 327 pips—or 2.9%—from its June 24 low of 1.1355. The analysis suggests the move reflects a dollar unwind rather than a sustained euro breakout, given the pair’s position within a compressed three-month range.
The trading range for EUR/USD has narrowed to just 3.4% between 1.1359 and 1.1740, an exceptionally tight band for a G10 major over a quarter. The current level of 1.1682 sits 58 pips below the range’s upper boundary and 323 pips above the lower bound, leaving the euro at the upper edge of a constrained range rather than decisively through it.
The catalyst for the dollar’s decline stems from US Treasury market dynamics. Last week, the Treasury announced it would at least double the maximum size of its long-dated debt buyback operations, raising the per-operation ceiling from $2 billion to at least $4 billion for 10-to-20-year and 20-to-30-year maturities. The expanded program, running from September 9 to November 4, was interpreted by the market as a supply-side decision aimed at lowering long-term yields rather than a pure liquidity measure.
On Monday, two senior Treasury officials indicated the department could fund the expanded buybacks using a General Account holding approximately $950 billion, well above the $550 billion to $600 billion target maintained under the prior administration. The 10-year Treasury yield fell 3 basis points to 4.708%, while the 30-year yield declined 4 basis points to 5.23%, reinforcing the dollar’s retreat.
The dollar index, a key barometer of the greenback’s strength, slid to 98.723 on Monday, its lowest level since May 14. The index’s decline has been gradual and uninterrupted for several sessions, with the euro’s 57% weight in the basket driving a near-mirror relationship between EUR/USD and the dollar index. The analysis notes that a dollar index stabilizing above 98.723 would cap EUR/USD below 1.1740, while a break of that level could open the door to gains toward 1.18 and beyond.
The structural headwind for the euro remains the persistent rate differential between the Federal Reserve and the European Central Bank. The Fed’s federal funds rate stands at 3.50% to 3.75%, while the ECB’s deposit rate remains at 2.25%, leaving a nominal gap of 125 to 150 basis points in the dollar’s favor. This differential has not narrowed during the euro’s recent rally, creating a 35 basis point annual headwind for EUR/USD longs due to rollover costs.
Market expectations for Fed policy have shifted in August, with rate-hike odds declining from roughly 50% to the low 30s as softer jobs, CPI, and PPI data reduced the likelihood of further tightening. However, the Fed is still expected to hold rates through the end of 2026, freezing the rate gap rather than compressing it. On the euro side, the ECB has held rates since June and has not signaled a clear path forward, despite inflation running at 2.9% in July, above the 2% target.
The analysis argues that EUR/USD’s strength is driven purely by dollar weakness rather than euro-specific fundamentals or rate support, leaving the foundation structurally weak. Currency moves lacking a supportive rate differential tend to mean-revert, suggesting a fade toward 1.1740 rather than a chase higher.
The latest US economic data underscores the dollar’s vulnerability. The US Composite PMI surged to 56 in August, its highest reading since April 2022, driven by strong services activity and improving business expectations. The Services PMI reached 56.8, surpassing estimates of 54 and crushing the prior month’s 54.6. Manufacturing activity slowed to 53.2, but the overall composite reading signals an accelerating US economy.
Third-quarter GDP estimates were revised upward to 2.5% from 2% on the back of stronger investment—including AI-related capital deployment—and resilient consumer spending. The disconnect between robust US growth and a weakening dollar highlights the unusual dynamics currently at play in FX markets.
