The euro advanced to a three-month high against the dollar on Thursday, with the single currency last trading at 1.1684, up 0.05% from the previous session’s close of 1.1677. The pair reached an intraday peak of 1.1711 during the European session, marking its strongest level since mid-May.
The dollar index fell to an eleven-week low of 98.70, breaking below both its 200-day moving average and a technical floor that had held since mid-August. The index has declined roughly 0.82% from 99.515 on August 14, driven by a sharp drop in long-dated U.S. Treasury yields following a surprise announcement from the Treasury Department.
The Treasury doubled the size of its longer-dated debt repurchase operations, increasing the per-operation ceiling from $2 billion to at least $4 billion effective September 9 through November 4. The move, which drains liquidity from the Treasury General Account to purchase outstanding securities, coincided with a collapse in the 30-year yield from a nineteen-year high of 5.337% to 5.211%. The 10-year yield also eased to 4.696%, partially reversing the drop by Thursday.
The policy divergence between the Federal Reserve and the European Central Bank has also supported the euro’s advance. Market pricing assigns an 84% probability to a 25 basis point ECB deposit rate hike on September 10, lifting the rate from 2.25% to 2.50%. In contrast, the probability of a Fed hold at 3.50%–3.75% in the same month stands at 69.9%. The compression of the rate gap is occurring as the ECB tightens rather than the Fed easing, a structural shift from prior euro rallies.
The analysis suggests the euro’s momentum may be overbought, with the Relative Strength Index at 73.98 and price sitting 137 pips above the 20-period exponential moving average at 1.1547. The technical outlook for the dollar remains binary: a decisive break back above 98.74 could stabilize the index and push EUR/USD toward the low 1.17s, while a sustained move under 98.00 could open the path to 1.1800–1.1840.
The ECB’s policy shift reflects evolving inflation dynamics in the eurozone. Headline inflation rose to 2.9% in July, while ECB staff projections indicate average 2026 inflation at 3.0%, driven largely by energy costs. Non-energy industrial goods inflation increased from 0.7% to 0.9%, signaling potential pass-through to manufacturing input costs. However, some Governing Council members, including Olli Rehn, have cautioned that wage growth remains subdued and second-round inflation effects are not yet evident.
On the U.S. side, the Fed’s policy stance appears constrained. Despite hawkish minutes from the July meeting, which showed several officials prepared to raise rates, market pricing has shifted sharply following a series of weak economic data. July retail sales fell 0.6%, nonfarm payrolls declined by 23,000, and revisions to prior months totaled a downward adjustment of 103,000 jobs. The preliminary August University of Michigan sentiment reading also declined.
The combination of softer U.S. data and the Treasury’s liquidity measures has weakened the dollar’s near-term outlook, leaving the euro positioned to test higher resistance levels. The structural shift in the rate gap, combined with overbought momentum, raises the risk of a near-term pullback unless support holds.
