The euro remains under pressure as political uncertainties in Europe and potential trade tensions with the United States weigh on the currency. Despite President Donald Trump's openness to negotiations on tariffs, which could avert a trade shock and support the region's growth outlook, the euro's weakness persists. This is largely due to anticipated policy loosening by the European Central Bank (ECB), which typically results in a weaker currency as interest rates are lowered to stimulate economic activity. Additionally, the lack of compelling factors for investors to buy into the euro, apart from its undervaluation, continues to support a bearish outlook.
German front-end bonds are benefiting from safe-haven demand amid these uncertainties, with yields on two-year bonds trading rich relative to the euro short-term rate. The postponement of US tariffs against EU nations provides temporary relief but does not eliminate the underlying economic uncertainties. As a result, German bonds remain attractive to risk-averse investors, with yields likely to fall further if risk aversion persists, reducing the euro's relative attractiveness.
The US Dollar Index (DXY), which measures the dollar against a basket of major currencies, is currently at 108.81 as of 02:11 on February 4, slightly down from its last close of 108.99. The index remains near its 52-week high of 110.18, reflecting the ongoing strength of the dollar amid global economic uncertainties.