The exchange rate has shifted sharply over the past year, pushing the euro up to around $1.20. Behind this move sit US political tensions, interest-rate battles and shifting expectations for global growth – with some surprisingly positive consequences for European economies.
What 1.20 dollars to 1 euro actually means
For most people, exchange rates feel abstract until they hit a holiday bill or a mortgage payment. Yet when the euro buys $1.20, that signals a clear shift in global financial power compared with early 2025, when the two currencies were almost equal.
In early January 2025, a euro was worth just $0.98. Since then, the greenback has tumbled by more than 15% against the single currency. A mix of politics, central-bank decisions and investor mood has pushed money out of the dollar and into other assets.
For the euro area, a stronger currency means imports priced in dollars – energy, electronics, many raw materials – immediately cost less.
That does not mean the eurozone has suddenly become richer overnight. It means each euro now stretches further when buying goods and services denominated in dollars. That can ease inflation pressures and reshape trade flows in ways that are far from disastrous for Europe.
Why the dollar is under pressure
Rate cuts, political noise and investor nerves
The recent slide in the greenback has several roots:
- Interest-rate expectations: Markets now bet more heavily on US rate cuts, reducing the dollar’s yield advantage.
- Tensions between the White House and the Fed: Political pressure for lower rates unnerves investors who value central-bank independence.
- Global diversification: Large funds and central banks are nudging part of their reserves out of the dollar and into other currencies.
- Risk appetite: When investors feel less fearful, they often shift from safe-haven dollars into equities and riskier assets worldwide.
Each factor on its own wouldn’t necessarily push EUR/USD to 1.20. Together, they help explain why the dollar’s slide has lasted an entire year rather than a brief wobble.
Cheaper dollars, cheaper energy
For Europe, the most immediate impact is on the energy bill. Oil and gas are largely priced in dollars on global markets. When the dollar falls against the euro, energy imports become cheaper in euro terms, even if crude prices stay the same in dollars.
A weaker dollar works like an invisible discount on Europe’s energy imports, helping governments and households breathe a little easier.
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That discount then ripples through the economy. Lower energy costs reduce production expenses for factories, farms and service companies. Businesses can either protect their margins or pass on some of the savings through lower prices, easing inflation.
The effect extends beyond oil and gas. Many industrial metals, agricultural commodities and shipping costs are dollar-based. A softer dollar gives eurozone companies more room to manoeuvre on wages, investment and pricing.
China, the US and Europe’s shopping basket
Imports from China often feel lighter on the wallet
Europe buys a huge amount of manufactured goods from China, from smartphones and laptops to machinery and toys. While not all of that trade is billed in dollars, a substantial slice still is. When the dollar weakens:
- Part of Europe’s Chinese import bill shrinks in euro terms.
- Retailers get more flexibility on pricing or upgrading product quality.
- Some inflationary pressure from global supply chains is reduced.
This can reinforce China’s grip as a key supplier, especially for components and consumer electronics that are hard to replace quickly. For European manufacturers, cheaper imported inputs can raise competitiveness at home and in the rest of the eurozone.
US goods also feel more affordable
From cloud services to chips and advanced medical equipment, Europe imports a lot from the United States as well. With EUR/USD at 1.20, a European buyer paying €1 million for American software or hardware now sends fewer euros abroad than a year earlier.
For European firms, a softer dollar acts like a subsidy on imported technology and equipment from the US.
That can support digitalisation and productivity gains. A German mid-sized company upgrading its IT systems or a French hospital buying advanced scanners effectively faces a lower euro price tag than when the currencies were closer to parity.
Not everyone wins: exporters feel the pinch
Luxury and aerospace hedge, food producers suffer
A stronger euro is less comfortable for European companies selling into the US or other dollar-linked markets. Their goods become more expensive for American customers, unless they trim margins.
Large groups in aerospace and luxury tend to be well prepared. They routinely use currency hedging – financial contracts that act like insurance against exchange-rate swings. They also enjoy strong brands and pricing power; wealthy buyers of handbags or business jets are less sensitive to a 10–15% currency move.
The picture is different for food and drink exporters. A bottle of Bordeaux or a European cheese brand competes directly with Californian, Argentine or Australian products on American shelves.
When the euro rises, a mid-range French wine quickly looks pricey next to a similar US or Chilean bottle.
Margins are tight, and demand can shift quickly. Agricultural exporters also face tariffs and regulatory hurdles, which limit their ability to adjust prices freely.
What this means for investors with US exposure
Currency moves can eat into US stock-market gains
European retail investors increasingly hold US stocks and ETFs. Many bought Nasdaq or S&P 500 trackers over the past years, attracted by Wall Street’s stronger historical performance compared with European bourses.
When the dollar falls against the euro, the return seen by a euro-based investor shrinks, even if US markets soar. A simple illustration:
| Scenario (1 year) | Nasdaq performance in dollars | Dollar move vs euro | Approx. result in euros |
|---|---|---|---|
| Current type of year | +22% | -15% | ~+7% |
| Flat currency year | +22% | 0% | +22% |
The stock market can do its job, but the exchange rate quietly shaves off part of the gain when bringing dollars back into euros.
When selling can be the costly part
For long-term investors holding US shares through brokerage accounts or ETFs, the currency hit only becomes real when they sell or convert back to euros. As long as assets are held, the exchange-rate effect remains “on paper”.
Selling US stocks during a weak-dollar phase can lock in an unnecessary currency loss, even if the investment itself did well.
Some investors choose to wait for a stronger dollar before taking profits. Others use euro-hedged funds that neutralise much of the currency risk in exchange for a slightly higher annual fee.
How households and businesses feel it day to day
Travel, online shopping and energy bills
For individuals in Europe, the most tangible benefits are straightforward:
- Trips to the US get cheaper in euro terms.
- Online orders from US-based retailers can cost less after conversion.
- Governments and energy suppliers face lower fuel import costs, which can soften petrol and heating-price spikes.
Firms that import components or software in dollars gain breathing space. They might not cut prices immediately, but they can invest, hire or pay out dividends with less pressure from input costs.
Why some policymakers secretly like a stronger euro
Central banks in Europe still wrestle with the aftershocks of the recent inflation surge. A firmer euro helps by making imports cheaper, easing price tension without crushing domestic demand through extreme rate hikes.
Finance ministries see another angle: a smaller foreign-energy bill improves trade balances. That offers a little extra room in public finances at a time when many governments are juggling high debt and spending needs.
Key terms and practical angles
Exchange rate, depreciation, hedging – what the jargon means
Some common terms in this debate are worth unpacking:
- Exchange rate: The price of one currency in terms of another. EUR/USD at 1.20 means €1 buys $1.20.
- Depreciation: When a currency loses value relative to another. The dollar has depreciated against the euro.
- Hedging: Using financial instruments (like futures or options) to protect against currency moves hurting profits or returns.
For a small European exporter selling to the US, hedging can stabilise income in euros and make budgeting less stressful, even if it has a cost.
What if the Fed cuts rates further?
A lot now depends on US monetary policy. If the Federal Reserve cuts interest rates faster than expected, the dollar could weaken further as investors look for better yields elsewhere. EUR/USD might push beyond 1.20.
On the other hand, if inflation in the US stalls at a higher level and the Fed stays tougher than markets expect, the dollar could regain some lost ground. That would lift the euro cost of oil and imported goods again, while boosting the euro value of US investments.
For Europe, the current 1.20 level is a mixed but largely manageable situation: cheaper energy and imports, tougher conditions for some exporters, and a reminder that currency swings are never neutral.