Euro Extends Rebound Against Dollar as Yields Stabilize - Danske Bank

EUR/USD is currently trading near 1.15977, extending its recent rebound momentum. Danske Bank's research team notes that European yields remain elevated while U.S. Treasury yields have stabilized after a recent surge, supporting the euro's recovery toward 1.1600 against the dollar.

**Yield and Spread Dynamics**

The bank suggests that earlier interest rate differentials had favored the dollar over the euro, with EUR/USD coming under pressure earlier this week; as U.S. Treasury yields stabilize and European yields hold at elevated levels, spread pressures have eased, driving the euro's rebound. However, Danske Bank also cautions that market pricing for European Central Bank rate hikes is excessive, implying room for European rates to decline further, which could limit the sustainability of further euro upside.

**Key Catalysts Ahead**

Danske Bank views the upcoming FOMC meeting minutes as a key catalyst for near-term direction. If the minutes signal a more hawkish stance, U.S. Treasury yields could resume their rise, weighing on the euro; conversely, if the minutes lean dovish, the euro's rebound may have room to extend. Market reports indicate recent fund flows into euro assets, including the euro and German bunds, with the euro's exchange rate against dozens of major trading partner currencies nearing historical highs, though the negative impact of a stronger euro on export-heavy economies like Germany is also drawing attention.

**Risk Warnings**

Analysts surveyed by Bloomberg expect the euro to continue strengthening, potentially reaching €1.21 per dollar next year, but institutions such as Crédit Agricole remain cautious about the risk of a pullback following the euro's rapid appreciation. In the near term, the battle around the 1.16 level for EUR/USD still hinges on relative shifts in U.S. and European monetary policy expectations.