Dollar-Euro Exchange Rate 2026: Forecast in the Tension Between Monetary Policy and Economic Stimulus Programs

The US dollar-euro exchange rate is one of the most closely watched indicators in international financial markets. The relative valuation of these two leading currencies not only determines trade flows between the US and the Eurozone but also influences global investment decisions and geopolitical tensions. What moves these two currencies, and what dollar-euro exchange rate forecast is emerging for 2026?

The Current Context: Diverging Economic Paths

The economic development in the US and the Eurozone is currently on different trajectories. While the US economy is driven by robust consumer spending and technological investments, the Eurozone faces structural challenges and more subdued growth. This asymmetry is not only relevant for economists—it directly shapes the dynamics of the dollar-euro exchange rate.

The EU Commission forecasts a GDP growth of 1.3% for the Euro area in 2025, followed by 1.2% in 2026 and 1.4% in 2027. These moderate rates are supported by higher exports, increased investments, and a strong labor market. At the same time, a significantly more dynamic expansion scenario is expected in the US, albeit under the sign of persistent inflation.

Inflation Differential as a Gauge of Currency Development

A critical factor in the dollar-euro exchange rate forecast is the divergence of inflation rates. By the end of 2025, a clear gap has emerged: the Eurozone lowered its annual inflation rate to 2.1% in October, approaching its ECB target of 2%. In contrast, inflation in the US remains stubbornly around 3%, exceeding the Federal Reserve’s target of 2%.

For 2026, the EU Commission expects a further decline to 1.9% in the Euro area, while US inflation is projected to fall to about 2.6%. This inflation differential, from an economic theory perspective, favors a further appreciation of the euro against the dollar, as purchasing power parity long-term drives currency valuations.

Key Interest Rates and Monetary Policy: The Central Tension

The main argument for a euro appreciation in 2026 lies in the divergence of monetary policy paths. The ECB has already reached its target regime and is likely to keep its key interest rates at current levels. Conversely, the Trump administration signals further rate cuts in the US. This interest rate gap creates a natural upward pressure on the euro, as investors seek higher yields in euro-denominated assets.

However, counterarguments suggest a less pronounced euro appreciation: the persistently low growth in the Eurozone and the potential strength of the US economy—bolstered by massive investment programs and tax cuts—could support the dollar.

Fiscal Policy as a Wildcard: Germany’s Spending Package and the Trump Agenda

A major uncertainty lies in the monetary policy measures themselves. The US has launched a massive investment program and implemented tax cuts, yet inflation remains above the target. Germany, as the strongest economy in the Eurozone, has also rolled out a significant spending package—but with a notably lower inflation rate.

The key question for 2026 is: will these programs produce the expected expansionary effects? Germany’s package remains a “black box,” as the conditions within the German economy remain tense and the actual economic impact is difficult to predict.

Balance of Payments Trends: A Structural Argument for the Euro

Balance of payments reveal structural differences between economic regions. The US has a persistent current account deficit—in Q2 2025, about 250 billion USD or 3.3% of GDP. This deficit is financed by capital inflows.

In contrast, the EU showed a current account surplus of about 81 billion euros (1.7% of GDP) in the same period. According to classical economic theory, a current account deficit tends to lead to currency depreciation over the long term, while a surplus supports appreciation. This fundamental dynamic underpins the forecast of further euro strength.

Trade Policy as a Volatility Driver

Trade policy under the Trump administration remains a volatility factor. After initial tariff threats in April 2025, the US and the EU agreed on a comprehensive trade deal with base tariffs of 15%, with sensitive sectors like steel and aluminum facing higher rates. While this normalization reduces immediate uncertainties, geopolitical risks remain.

Market Expectation: A Moderate Euro Rise

The current market consensus suggests that the euro will continue to appreciate against the dollar until 2026. This scenario is primarily based on the expected interest rate gap, better inflation development in the Eurozone, and improving balance of payments.

However, the old adage applies: “Forecasts are difficult, especially regarding the future.” The actual dollar-euro rate will depend on how reliably key assumptions materialize—particularly how effectively expansionary fiscal programs work and how stable monetary policy paths remain.

Frequently Asked Questions about the Dollar-Euro Dynamics

What factors most influence the dollar-euro exchange rate?
The Federal Reserve’s and ECB’s interest rate policies, geopolitical events, and macroeconomic performance of both regions are the dominant drivers.

How does the inflation differential affect?
Higher inflation in a country weakens its currency, as purchasing power declines. The current inflation differential (US at ~3%, Eurozone at ~2.1%) favors euro appreciation, as the ECB is closer to its target and acts more stably.

What does the EU Commission expect for Eurozone growth until 2026?
The Commission forecasts a GDP growth of 1.2% for 2026 in the Eurozone, supported by export dynamics, investments, and a solid labor market.

How do trade policies and tariffs influence the exchange rate?
Trade tensions and tariff measures create volatility in the forex market. The new US-EU trade agreement reduces immediate uncertainty, but geopolitical risks remain.