Why the euro was the big winner in foreign exchange in 2025

The euro is proof that once something in financial markets becomes overly hated, it doesn't take much to lift it.

The common currency was the top G10 currency in 2025, rising 13.3% against the US dollar. It was closely followed by the Swiss franc with the Australian dollar and British pound in third and fourth place, respectively, gaining about 7.5% each. The US dollar was the worst performer.

Part of the key for the euro was a dismal starting point. It ended 2024 at 1.02, which was the worst since a brief period in 2022 and the worst-ever annual close. That came after years of serially disappointing growth.

What changed in 2025 was a loosening of the fiscal purse strings in a move that largely the result of pressure from Russia and Trump. German officials delivered a dose of sobriety while facing political threats from Russia and the USA along with manufacturing threats from China. Internally, the rise of the AfD also led to soul searching and a return to practicality and away from the disastrous Green-driven ideologically decision-making like shutting down nuclear power plants.

There were also some other bright spots with the Spanish economy outperforming, leading to a mammoth 49% rally in the IBEX, leading major stock market indexes globally.

The re-injection of realpolitik into Europe was a welcome development and it means a fresh focus on growth-oriented policies that have attracted capital, in large part due to very low valuations. That's a trend I think that can continue to float the euro form a still-low level of 1.17.

A basis for further gains in the euro in the year ahead could be the ECB. It's looking like the central bank eased rates early and sufficiently. That's something that could begin paying dividends in 2026 if it spurs growth. The market has already priced in an end to the ECB rate-cutting cycle and an uptick in growth could spark talk about rate hikes.

Europe is still far from a dynamic economy but at least policymakers are now focusing on the right things. That's earned the benefit of the doubt of the market (or at least some short covering). Now comes the hard part of executing.