Dollar Hits 2-Year High As European Recession Fears Hammer Euro, Pound

The U.S. dollar surged to its highest level in over two years against a basket of currencies on Friday, extending its rally to an eighth consecutive week — the longest winning streak in 14 months.

A wave of weaker-than-expected business activity data from Europe has weighed heavily on the euro and the British pound, as investors brace for faster rate cuts by the European Central Bank (ECB) and the Bank of England (BoE).

Eurozone PMI Dives Into Contraction

In November, private-sector activity in the eurozone unexpectedly contracted, triggering fresh concerns about the region’s economic outlook.

The Composite Purchasing Managers’ Index (PMI), compiled by S&P Global, fell to 48.1, well below the neutral 50 threshold and missing forecasts for an unchanged reading. This marks the first contraction in eurozone business activity since January.

The downturn was driven by a drop in new orders, higher input prices, and escalating political uncertainty.

Chris Williamson, chief business economist at S&P Global, commented: “The flash PMI survey data for November showed the eurozone economy falling back into contraction, as malaise spread from the struggling manufacturing sector to the larger services economy.”

UK Economy Also Contracts

Across the Channel, the UK also delivered a disappointing PMI reading. The Composite PMI fell to 49.9, a drop from the previous month's 51.8, and below market expectations of 51.7.

This marks the first contraction in UK private-sector activity since October 2023.

“The November PMI is indicative of the economy slipping into a modest decline, with GDP dropping at a 0.1% quarterly rate, but the loss of confidence hints at worse to come – including further job losses -unless sentiment revives,” Williamson said.

Dollar Index Climbs as Euro, Pound Tumble

The U.S. Dollar Index (DXY), a key measure of the greenback's performance which is closely tracked by the Invesco DB USD Index Bullish Fund ETF (NYSE:UUP), climbed above 107 — a level last seen on Nov. 18, 2022.

The euro plunged to 1.04 against the dollar, its lowest level in two years. The pound fell to 1.25, on track for its eighth straight weekly loss — the longest losing streak since 1980.

On Friday, S&P Global will release flash PMI data for the U.S. economy at 9.45 a.m. ET. Economists predict the Services PMI to edge higher from 55 to 55.2 in November, which would mark the strongest expansion since August.

Manufacturing momentum is also expected to improve from 48.5 to 48.8, albeit remaining in contractionary territory.

Analysts: Euro Vulnerable Amid Weak Data And Geopolitical Risks

Forex analysts point to several catalysts for the euro's sharp decline.

“The worsening of the Ukrainian crisis has opened up a phase of risk aversion, hitting the EUR and GBP,” said Luca Cigognini, a forex strategist at Intesa Sanpaolo.

Chris Turner, an analyst at ING Group, highlighted the technical significance of the euro's drop: “Today's release of softer-than-expected eurozone PMIs proved the catalyst for EUR/USD to break to the downside of its two-year trading range. Even though a near 7% drop in just two months is exceptionally rapid by historical standards, we remain confident in a lower EUR/USD trajectory. Support is limited, with the next key level around 1.0190/1.0200.”

BBVA analyst Alejandro Cuadrado echoed similar concerns, pointing out that additional downside pressure on the euro could arise from political instability in Germany, the outcome of the U.S. elections, and intensifying geopolitical risks.

“The tense situation in Europe could worsen in the short term, and investors are clearly taking a cautious approach on the EUR,” he said.

Cuadrado's colleague, Michalis Onisiforou, shed light on Germany's economic struggles: “The collapse of Germany's coalition government and early elections mean there won't be any immediate fiscal response to alleviate the pessimism surrounding the domestic economy. Coupled with escalating risks in the Russo-Ukrainian war, Germany faces significant headwinds.”

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