The euro hovered near a one-month low as US military deployments signaling potential strikes against Iran dampened risk appetite and bolstered the US dollar.
This week, the euro has fallen approximately 0.8%, marking its worst performance in three months and setting it up for an eighth decline in nine trading sessions. In London trading, the euro traded around $1.1765 against the dollar. The latest decline was driven by oil prices hitting a six-month high and increased US pressure on negotiations concerning Iran's nuclear program.
Strong US economic data has already weighed on the euro by reducing market expectations for Federal Reserve interest rate cuts. According to Danske Bank FX analyst Kirstine Kundby-Nielsen, geopolitical factors are now providing additional support for the dollar, with rising crude oil prices contributing to broad-based dollar strength.
US President Donald Trump has given Iran a maximum of 15 days to reach an agreement. The US military is deploying a significant force in preparation for potential strikes against the major oil producer, representing the largest military buildup since 2003.
ING Bank NV foreign exchange strategist Francesco Pesole noted that the euro remains overvalued, and geopolitical risks are not yet fully priced in by the market. He stated, "This implies further downside risks for EUR/USD, with the exchange rate potentially falling to 1.16 if the situation escalates significantly."
Options market activity aligns with this view. The risk reversal indicator, a gauge of market positioning and sentiment, shows that short-term positions have shifted to their most bearish stance since October. Data from the Depository Trust & Clearing Corporation indicates traders are focusing on the $1.17 area—the most frequently used strike price for euro put options this week—with significant demand extending toward the $1.15 region.
Most of these positions are set to expire within the next month, suggesting traders are prioritizing protection against short-term euro weakness rather than betting on a major, prolonged decline.