Concerns about a European withdrawal from US assets were short-lived, despite initial fears sparked by news of Danish pension fund AkademikerPension exiting US Treasuries. The fund’s holdings were minimal, valued at $100 million in December. Markets showed little reaction, even with hopes for geopolitical de-escalation from the Davos discussions.
The Euro is expected to remain below 1.170 against the US dollar despite Davos-driven optimism. The potential for European currency gains may be limited unless there is a major spike in bond volatility. This period is typically strong for the US dollar, and recent hawkish adjustments in front-end USD yields also influence the market.
Swedish Krona Rally Caution
In other parts of Europe, there is caution towards the rally in the Swedish Krona. The EUR/SEK is seen as over 2% short-term undervalued, suggesting a possible correction to 10.80 before resuming a longer-term depreciation. These insights are compiled from observations by market analysts, without any personal opinions.
Looking back at this time last year, in January 2025, we noted the view that EUR/USD belonged below 1.170. That call proved correct as hawkish Fed repricing and seasonal dollar strength dominated much of last year. Now, with the pair trading near 1.1850, the dynamics are shifting, and we must reconsider our positioning.
The key driver has shifted from the aggressive Fed hikes of 2025 to a potential policy divergence with the European Central Bank. Recent US inflation data coming in at 2.8% has cooled Fed expectations, while Eurozone inflation remains stickier at 3.5%, keeping the ECB on a more hawkish footing. This fundamental change suggests that the path of least resistance for EUR/USD may now be upward.
Shifting Strategies in Currency Markets
For derivative traders, this environment calls for a shift away from the outright bearish puts that were profitable last year. We see value in structures like call spreads, targeting a move towards 1.2000 over the next quarter, which can capitalize on a gradual euro appreciation. With bond volatility, as measured by the MOVE index, now stable around 95, the cost of options is more reasonable than during the spikes of 2025.
The minor concerns we saw in early 2025 about a European exit from US assets never materialized into a significant trend. In fact, foreign holdings of U.S. Treasuries actually increased by over $300 billion through the last reported quarter of 2025, confirming the dollar’s persistent reserve status. This underlying demand for US assets should cap any extreme dollar weakness, making a strategy of selling out-of-the-money USD calls against a long EUR position attractive.
Similarly, the caution we expressed about chasing the Swedish Krona rally this time last year was well-founded. EUR/SEK did experience the upward correction toward 10.80 we anticipated before its longer-term depreciation resumed. We now see fewer short-term valuation extremes in the cross, suggesting traders should look for opportunities elsewhere.
