Bank of America expects the euro to rise to between 1.20 and 1.25 over the next year. They also note that the U.S. dollar might shift from slightly overvalued to undervalued. Analysts have observed that the dollar was overvalued for much of the past decade. However, it has recently approached fair value due to factors like German fiscal stimulus, continuing trade tensions, and worries about stability in U.S. institutions.

Potential Dollar Weakness

Bank of America warns that if U.S. institutional strength continues to weaken, the dollar could dip below fair value. This could lead to a more noticeable rise in the euro. We are starting to see signs that the dollar’s long stretch of strength might be ending, with a possible shift toward undervaluation ahead. This year, the dollar has been closer to its fair value, marking an important moment for the currency. We should brace for a time of euro strength as we head into next year. The outlook for a stronger euro is backed by key developments in Europe, particularly Germany’s recent fiscal stimulus. For example, Germany’s IFO Business Climate index for August 2025 rose to 92.5, marking its third consecutive monthly increase. This reflects growing optimism after lawmakers approved a new green infrastructure package, providing a strong base for better economic performance in the Eurozone.

Trade Difficulties and Market Volatility

Meanwhile, the dollar is also facing challenges from ongoing trade issues and a rising deficit. The latest trade data from July 2025 shows that the U.S. deficit expanded to $75 billion, as stalled negotiations with key trading partners create uncertainty. These ongoing imbalances affect the long-term outlook for the dollar. Concerns about the stability of U.S. institutions are also making investors nervous, leading to increased market volatility. The VIX index has been rising since August 2025, moving up from summer lows to about 18 as the political environment becomes more contentious. This situation might prompt investors to move away from U.S. assets if conditions worsen. For those trading derivatives, this long-term forecast indicates that positioning for a stronger euro in the upcoming weeks is a smart strategy. Consider buying medium-term EUR/USD call options, possibly with strike prices around 1.1800 and expirations in early 2026. This strategy allows for potentially significant gains if the euro starts to rally while keeping downside risk limited. A more cautious approach would be to use bull call spreads to lower initial costs. For example, one could buy a March 2026 call with a 1.17 strike while simultaneously selling a call with a 1.22 strike. This strategy benefits from a steady, gradual rise in the euro-dollar exchange rate rather than a sudden spike. This situation feels reminiscent of the dollar’s decline from 2002 to 2008, when there were similar concerns about U.S. deficits and policies. History suggests that when such multi-year trends begin, the first signs are often subtle. Thus, establishing early positions now could be very rewarding over the next several quarters. Create your live VT Markets account and start trading now.

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