Concerns about Europe pulling back from US assets didn’t last long. Initial worries arose when Danish pension fund AkademikerPension withdrew from US Treasuries, which were only worth $100 million in December. The market barely reacted, even with hopeful discussions about reducing geopolitical tensions at Davos. The Euro is projected to stay below 1.170 against the US dollar, despite the positive outlook from Davos. European currency gains could be limited unless bond volatility spikes significantly. This time of year usually favors the US dollar, especially with recent hawkish shifts in front-end USD yields.

Beware the Swedish Krona Rally

In Europe, there is caution about the rising Swedish Krona. The EUR/SEK exchange rate is considered over 2% undervalued in the short term, indicating a possible correction to 10.80 before a longer-term decline. These observations are based on market analysis, not personal opinions. Looking back to January 2025, experts believed that EUR/USD should trade below 1.170, and they were right. The hawkish Fed adjustments and seasonal strength of the dollar affected the market throughout last year. Now that EUR/USD is near 1.1850, we need to rethink our market strategies. The focus has shifted from the aggressive Fed hikes of 2025 to a potential divergence in policy with the European Central Bank. Recent US inflation figures showed a cool 2.8%, easing Fed expectations. In contrast, Eurozone inflation remains stubbornly high at 3.5%, keeping the ECB more aggressive. This change suggests that EUR/USD may now trend upward.

Adapting Currency Market Strategies

For traders dealing in derivatives, it’s time to move away from last year’s profitable bearish puts. We see value in using call spreads, aiming for a rise to 1.2000 within the next quarter to take advantage of gradual euro appreciation. With bond volatility, measured by the MOVE index, stabilizing around 95, option costs are more reasonable compared to the spikes in 2025. The initial fears in early 2025 about Europe withdrawing from US assets never turned into a significant trend. In fact, foreign holdings of U.S. Treasuries grew by over $300 billion in the last reported quarter of 2025, confirming the dollar’s strong reserve status. This ongoing demand for US assets should limit any major dollar weakness, making it wise to sell out-of-the-money USD calls while holding a long EUR position. Likewise, our caution about the rising Swedish Krona last year was justified. The EUR/SEK did rise to the expected correction of 10.80 before continuing its long-term decline. Now, we see fewer short-term extremes in this currency pair, indicating that traders should look for opportunities in other markets. Create your live VT Markets account and start trading now.

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