The Euro reaches a four-year high, traders prepare for a Fed rate cut.

The euro reached a four-year high as traders prepared for the Federal Reserve to cut interest rates this week, which will strengthen the policy divergence between the Fed and the European Central Bank. On Tuesday, the euro rose to its highest level since September 2021, climbing 0.7% to 1.1847 against the dollar. Since 2025, the euro has risen by about 14% against the dollar, with nine months of performance expected to be the best on record. The market expects the Fed to cut interest rates three times before the end of the year, each time by 25 basis points, while the ECB is not expected to cut rates further, narrowing the gap between the key rates of the two central banks. Options markets indicate that this could lay the foundation for the euro to move towards the widely watched level of 1.20. Rate hikes are usually favorable for the country's currency. The U.S. is leaning towards easing due to a cooling labor market, while defense and infrastructure spending in Europe are expected to boost growth and inflation, leaving the ECB on hold - and even possibly being forced to hike rates in the end.