Nordea analysts report that recent US economic outperformance may have peaked, and they describe foreign holders as heavily allocated to US assets. They say this could lead to further US dollar weakness, which may support the euro and lift EUR/USD over time.
They note that, despite a marked fall over the past year, the US dollar is not weak by historical standards. They add that low term premiums suggest foreign holders have not fully reduced US exposure.
Foreign Allocation And Dollar Rebalancing
They outline a rebalancing example: if foreign allocation to US assets moved from 50% to 40% while the US runs a current-account deficit, foreigners cannot collectively sell those assets to US buyers. They state that the adjustment would need a 20% drop in the relative value of US assets.
They attribute part of the dollar’s strength over the past two decades to weaker European conditions after the European debt crisis, including austerity and small deficits. They report that this may shift as Europe increases spending on defence and infrastructure.
They add that higher investment could raise growth, and with low unemployment may also lift inflation pressures, leading to higher interest rates. They say this could support the euro as an alternative to the US dollar.
Given the recent data, we see the long-standing trend of US economic outperformance is likely over. January’s advance GDP figures for the US showed a slowdown to 1.5%, while Eurozone flash PMI figures just surprised to the upside at 51.5, suggesting a fundamental shift is in motion. Traders should consider positioning for a continued rise in EUR/USD, as the economic momentum now favors Europe.
Positioning For A Stronger Euro
Even after the dollar’s notable decline through 2025, it remains strong in a historical context, leaving plenty of room for further weakness. The latest Treasury data for December 2025 showed a fourth consecutive month of net foreign selling of U.S. assets, confirming that global investors are actively reducing their overexposure. This structural rebalancing supports buying longer-dated EUR/USD call options to capitalize on a multi-month trend.
The narrative of European weakness that defined the last decade is changing. Major new joint investments in defense and energy infrastructure, accelerated by events over the past two years, are beginning to stimulate growth and create tighter labor markets. This environment could lead to stickier inflation and keep the European Central Bank on a more hawkish footing than the Federal Reserve.
This shift means the reallocation away from US assets can only happen through a drop in their relative value, which translates to a weaker dollar. We saw this play out last year, as the Dollar Index (DXY) fell nearly 9% in 2025 despite the US still running a current account deficit. The path of least resistance for the pair appears higher, making strategies like bull call spreads on EUR/USD attractive for a cost-effective way to position for more upside in the coming weeks.
