Euro defies rate-cut logic as European Central Bank moves fail to shake confidence in currency’s strength

Despite widespread expectations of a 25-basis point rate cut at the European Central Bank’s meeting today, the euro remains remarkably resilient, defying conventional financial logic and keeping pressure on global currency markets.

The euro-dollar exchange rate, a critical barometer of global capital flows, has surged more than 11% in the first half of 2025.

Ordinarily, such gains would be unlikely in the face of looser eurozone monetary policy and a widening yield gap with the United States (US).

But analysts say the traditional levers that typically drive currency moves have broken down, ushering in a new era where structural, not cyclical, forces are in control.

“The market is no longer dancing to the usual interest rate tune. The fact that the euro is holding firm even as the ECB cuts rates shows that deeper shifts are at play, particularly a strategic rethink around the US dollar,” says Max Rix, an economist at Simonis Storm.

Historically, a dovish ECB combined with a more patient US Federal Reserve would depress the euro by incentivising capital flows to higher-yielding US assets.

Yet, the opposite has happened.

The two-year yield differential between the eurozone and the US has widened to over 200 basis points, but instead of falling, the euro has rallied, a clear sign that global investors are looking past short-term returns.

Rix notes that concerns over the long-term sustainability of the US’ fiscal position are prompting some investors to hedge against dollar risk.

“There’s growing unease about America’s ballooning debt and its implications for the dollar’s role as the global reserve currency. For some, the euro, despite Europe’s own challenges, is seen as the lesser evil,” he says.

For now, the euro appears to be buoyed by structural capital flows, and unless the dollar narrative changes dramatically, euro strength may become the new norm.

Photo: Contributed

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