The dollar bear market is not over, and the euro is expected to return to the milestone level of 1.20

According to Zhitong Finance APP, as investors generally bet on the increasingly divergent interest rate paths of the Federal Reserve and the European Central Bank, the euro, the common currency of Europe, will continue to benefit, with the euro expected to rise to the significant milestone of 1.20 USD soon.

During Tuesday's European trading session, the euro rose 0.1% against the dollar to 1.1780 USD, reaching the highest point since July 24, before slightly retracing its gains ahead of Thursday's European Central Bank decision. The options market has reinforced this trend, with the so-called "risk reversal" indicator showing strong bullish sentiment across various maturities. Statistics from the Depository Trust & Clearing Corporation (DTCC) indicate that one-third of the bullish options bets since last Friday target a breakout above the 1.20 USD level. The latest movements and predictions regarding the euro against the dollar further strengthen the so-called "long-term bear market logic for the dollar."

"The next key resistance level is around 1.18 USD, and if stop-loss orders are triggered, it could accelerate the upward trend," said Thomas Bureau, co-head of foreign exchange options at Société Générale.

The pace of bullish bets on the euro is accelerating—traders are confidently positioning for a euro bull market above 1.20 USD.

Last week's extremely weak U.S. non-farm payroll data further strengthened the euro exchange rate, reinforcing market expectations for a deeper rate cut by the Federal Reserve (including bets on a 50 basis point cut in September) and continuously pressuring dollar bulls. Meanwhile, the European Central Bank has paused its easing monetary policy cycle, with the money market assigning less than one-third probability for a rate cut in December. If today's U.S. employment data sees another very negative benchmark revision, it could further support the euro exchange rate.

With the U.S. unemployment rate at its highest since 2021, some Wall Street analysts believe there is a possibility of significant rate cuts by the Federal Reserve. A team of strategists from Standard Chartered now expects the Federal Reserve to cut rates by 50 basis points next week.

"The underlying cyclical support for the dollar has deteriorated, as evidenced by the significant narrowing of the euro-dollar interest rate spread, which aligns with the fair value of the euro/dollar in the range of 1.18-1.20," said George Saravelos, global head of foreign exchange research at Deutsche Bank.

"It is evident that if the Federal Reserve further cuts rates after September, it will increase overseas investors' willingness to hedge against dollar assets," he added.

The euro also ignored political risks in France, rising 0.4% on Monday, even as French Prime Minister François Bayrou lost a no-confidence vote in parliament, with the cost of hedging against the euro's strength also rising simultaneously.

Analysts at Danske Bank in Denmark wrote in a report that wider French spreads may limit the euro's upside potential, but they still believe that the common currency is undervalued compared to the dollar "The French government may face a downgrade in its sovereign rating after the resignation of Prime Minister Borne, although a full-blown financial crisis remains unlikely given that its current account is close to balance," said Holger Schmieding, chief economist at Berenberg.

"European Central Bank President Christine Lagarde must tread carefully on Thursday, neither hinting that the ECB might ultimately rescue a recalcitrant fiscal sinner nor taking such a hard line that it disrupts the markets that still grant France a degree of benefit of the doubt," he emphasized.

Technical indicators are turning bullish for the euro exchange rate, particularly with the formation of a so-called "bullish belt hold" on the monthly chart, indicating that the euro is very likely to retest the July peak of $1.1829. In the short term, the so-called "greed-fear" indicator shows that euro bulls are in their strongest position in over two months.

Morgan Stanley's Bold Prediction: The Dollar Bear Market is Far from Over

Wall Street financial giant Morgan Stanley recently released a research report stating that the dollar bear market is far from over, with the current decline of the dollar "only halfway through." The core argument of this report points directly to expectations of a shift in Federal Reserve policy. Morgan Stanley's U.S. economic team believes that the Fed is now "more willing to tolerate the threat of higher inflation."

This also means that if the U.S. benchmark interest rate continues to decline under the guidance of the Fed, and inflation stubbornly remains above target due to tariffs being passed on to consumer prices, then U.S. real yields will be eroded. Furthermore, the market's pricing trend for increased easing by the Fed continues to escalate, with the institution's rate team maintaining long positions in 5-year U.S. Treasuries, expecting the front end of the curve to price in a deeper rate cut cycle.

Global investors are preparing for the continued collapse of the "American exceptionalism" narrative, the potential for the Trump administration to continue threatening the independence of the Fed, and the weakening of the U.S. economy following extremely weak non-farm payrolls and Fed rate cuts. These factors are all showing significant impacts, collectively pushing the dollar toward a long-term bear market trajectory.

"Recent actions by the U.S. government have long-term implications for the dollar," said Jayati Bharadwaj, head of foreign exchange strategy at TD Securities. "This is eroding the dollar's status as a safe-haven investment, and risk premiums should begin to weigh heavily on it."

"If Trump resets the relationship with the Fed, it would be similar to the negative dynamics we see elsewhere in emerging markets, which is not bullish for a country's sovereign currency," said Sahil Mahtani, head of investment research at London-based asset management firm Ninety One.

Amid threats to the Fed's independence, market risk aversion and panic over overvalued tech giants have surged, driving safe-haven assets like gold and silver to be eagerly sought after by market risk-averse funds—gold has already surpassed $3,600 and continues to set new historical highs, while the dollar remains weak due to ongoing threats to the Fed's independence