Dollar vs. Euro: Who Will Emerge Victorious from the Summer Battle of 2026

Author and Editor-in-Chief: Vitaliy Kisternyy01.09.2026 20:15:00

August 2026 became the month when the familiar rules of the game on the currency market stopped working.

The dollar index (DXY) plunged to 98.8 — for the first time since May, breaking through the 200-day moving average and losing 2.3 points over the month from the level of 101.14 on July 22. The euro, on the contrary, soared above $1.17 for the first time in three months.

It would seem that the dollar held all the trump cards: a war in the Middle East, record Treasury yields, and hawkish rhetoric from the Fed. But the market decided otherwise. Why the old rules no longer work and who will emerge victorious from this battle — let's figure it out in order.

Photo: © Belnovosti / U.S. dollar. Author Vitaliy KisternyyWhy the Dollar Is Losing the Summer Battle

It would seem that the dollar has everything it needs to strengthen. The yield on 30-year U.S. Treasury bonds has surged to highs unseen for nearly two decades. Geopolitical tensions in the Middle East have reached their peak. And the Federal Reserve is keeping its rate at 3.5–3.75% — higher than in any other developed economy.

But instead of strengthening, the dollar has plunged to a three-month low. The main reason is the decision by the U.S. Treasury Department to increase monthly purchases of long-term bonds from $2 billion to $4 billion. Investors perceived this not as a technical adjustment, but as a signal of weakness: Washington is willing to intervene in the market to contain the rise in yields. This undermined confidence in the dollar as a freely formed asset.

The second reason is that the U.S. economy is sending alarming signals. In July, the country lost jobs for the first time in a long while, retail sales fell, and inflation slowed faster than forecasts. The probability of a Fed rate hike at the September meeting collapsed to 30%. A Reuters poll showed that 90 out of 104 economists expect the rate to remain unchanged at least until the end of the year.

The Euro Is Seizing the Moment

While the dollar is weakening, the euro is confidently gaining altitude. At the end of August, the EUR/USD pair traded in the range of 1.1670–1.1710, refreshing its highs since May. The reason is not only the dollar's weakness, but also the euro's own drivers.

Markets are almost unanimous: the European Central Bank will raise its rate at the September meeting. Unlike the Fed, which has taken a pause, the ECB is most likely to continue tightening. As UBS notes, if the ECB raises its rate and the Fed does not, the euro will receive an additional boost to growth.

Adding to this are unexpectedly strong data from Germany: the Ifo index and GDP exceeded forecasts, which bolstered confidence in the European economy. Scotiabank analysts see the EUR/USD pair in a consolidation phase in the middle and upper range of 1.16.

What the forecasts say: a spread of opinions

Forecasts from leading banks on the euro differ, reflecting the depth of uncertainty. Bank of America expects EUR/USD to fall to 1.12 in the third quarter and to 1.15 by the end of the year. At the same time, the consensus forecast points to 1.1572 by September and 1.1712 by December.

Analysts warn: much will depend on what Fed Chair Kevin Warsh says at the Jackson Hole symposium. If he delivers hawkish signals, the dollar may get a temporary reprieve. If, on the other hand, he focuses on risks to the economy, the decline may continue.

What's next

The dollar has found itself in the unfamiliar role of the one playing catch-up. The old rules — high yields = strong dollar, geopolitical chaos = flight to the dollar — no longer work. Investors have grown weary of war and have shifted their focus to the fundamental problems of the United States: record sovereign debt, budget deficit, and doubts about the Fed's independence.

The euro, on the contrary, is receiving support from expectations of ECB policy tightening and improving economic data in the eurozone. The coming weeks will show whether the dollar can hold above the key support of 98.3 or continue its decline. One thing can be said for certain: the summer currency battle is far from over.

Belnovosti on GoogleAdd to favorite sources