The euro traded just below $1.18 in a holiday-shortened week, hovering near its strongest level since late September and set for a 14.7% gain against the dollar in 2025, reflecting diverging policy paths between the European Central Bank and the Federal Reserve.
The ECB kept interest rates steady in December and signaled they are likely to remain unchanged for some time, with ECB President Christine Lagarde noting the high uncertainty makes forward guidance on future rate moves difficult.
In the US, markets are preparing for President Donald Trump to nominate a new Fed chair to replace Jerome Powell when his term ends in May, potentially favoring lower rates.
The Fed cut the federal funds rate by 25 basis points at its December meeting to 3.50%-3.75%, completing a cumulative 75 bps of cuts in 2025 amid a cooling labor market and moderately elevated inflation.
Investors are pricing in two more rate reductions next year, which could weigh on the dollar and further support the euro.