9lgoxn5[2aevui0v}hbb3k8c_media_dl_1.png Bloomberg

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(Bloomberg) — Wall Street banks are capitulating on bets for a stronger euro, as markets see the US outpacing Europe on interest-rate hikes for the rest of this year.

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The likes of JPMorgan Chase & Co., Morgan Stanley and Bank of New York Mellon Corp. think the common currency could slide over 3% to hit $1.10 in the next year. It’s already slumped this month to a one-year low, as traders factor in a rate increase from the Federal Reserve in 2026 and are no longer fully pricing one from the European Central Bank.

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That’s a turnaround from early this year when policymakers in Europe were fretting that the euro was too strong, after it broke above $1.20 to the highest in nearly five years. Instead it was deflated by the war in Iran, when the surge in oil prices fueled a rush for dollars, and now a cautious approach by the ECB means the euro is falling further out of favor.

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“The euro-dollar could very easily reach $1.10 as medium-term investors unwind their structural dollar shorts, while speculative investors could ‘pile on’ as momentum picks up,” said strategists at Morgan Stanley including David Adams.

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JPMorgan has slashed its mid-2027 target to $1.10 and Royal Bank of Canada now sees that level by the end next year. Bank of America Corp. and Wells Fargo & Co. have also cut their calls. While such forecasts often adapt to market trends, these are unusually sharp reductions, and are starting to take down the consensus in a Bloomberg survey that still sees $1.20 next year.

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Options have also turned more negative, especially for the longer term. One-year risk reversals, a gauge of sentiment and positioning, are the most bearish on the euro since March 2025. That means traders need to pay up to hedge against or bet on further euro weakness over the next year.

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“Whilst the dollar may consolidate its gains in the very near term, it’s hard to fight the momentum in that trade, here and now,” said Marcus Jennings at Wells Fargo.

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That momentum has been spurred by the latest twists in interest-rate bets. Before new Fed Chairman Kevin Warsh’s first meeting this month, traders worried he could be influenced by pressure from US President Donald Trump to reduce borrowing costs. Instead he made clear the central bank won’t tolerate high inflation, leading traders to pile into bets on a hike this year.

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Meanwhile his ECB counterpart Christine Lagarde then said there was no need to react more forcefully to the fallout from the Middle East conflict, following its single hike this month, because inflation is set to return to target over the medium term. 

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“We felt the ECB should not have hiked rates, and if anything their steps have weakened the case for the euro further because of the growth impact,” said BNY Mellon’s Geoff Yu. “While we do see potential for a dip below $1.10, we wouldn’t aggressively chase it.”

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Those who believe the Fed will also hold off from a hike, who remain negative on the dollar next year, or have more faith in Europe’s economy, have a more benign view on the euro. Bank of America, for example, has cut its call from $1.20 to $1.15, but says it’s neutral on the common currency.

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Still, those expecting a rally are disappearing fast.

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“The euro’s run is largely over,” said Kit Juckes, chief currency strategist at Societe Generale SA. “I don’t think an energy crisis can ever not be negative for the euro,” he said, drawing a parallel to 2022, when surging energy costs after Russia’s invasion of Ukraine hollowed out the bloc’s economy.

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