The euro’s rally is gaining ground, with traders betting on a move toward $1.20 and strategic analysts scrambling to update their forecasts.

Europe’s single currency hit its strongest level in three years late last week, as economic uncertainty sparked by the U.S. tariff policy raised questions about the dollar’s traditional role as a safe haven.

Three out of four options contracts bought last Friday were bets on higher euro gains, according to data from the Depository Trust & Clearing Corporation. Traders say hedge funds are targeting a move toward $1.20. Strategists at Mizuho International Plc also see rising odds that the currency will reach that level – its highest since mid-2021 – in the coming months.

As Jordan Rochester, head of macro strategy for EMEA at Mizuho International, puts it, “I see upside risk toward $1.15–$1.20 this year as the base case.”

The euro is reaping the most benefit from the dollar’s weakness, as investors reassess the role of the U.S. currency in the global financial system after President Donald Trump rattled markets with his tariffs, escalating the trade war with China to a new level. Germany’s finance minister said Friday that governments should seize the opportunity to give the euro more weight in global trade.

Now, strategic analysts are trying to calculate where the shared currency is headed next after its two-day leap of nearly 4%, from $1.10 to almost $1.15. The euro was trading at $1.1337, down slightly by 0.09%, at 7:45 a.m. in London.

So far, none of the 51 respondents in Bloomberg’s currency poll foresee the euro climbing past $1.15 this year, but two Europe-based traders reported large volumes moving on Friday aiming to cash in on further euro gains. Hedge funds are targeting a move toward $1.20 in the next three to six months, they said. Friday marked the second-largest trading volume ever recorded for euro options, according to DTCC data.

Positioning for a stronger euro in the options market ramped up sharply. So-called risk reversals – a market sentiment gauge that measures demand for buy or sell contracts on the currency – shot up last week, with one-week contracts showing the biggest swing toward a euro rally in five years. Volatility also jumped, closing at the third-highest level since 2010.

Leveraged traders and institutional players posted the biggest increase in euro positions in six months on April 8, according to positioning data from the CFTC.

Structural forces
There are key structural forces supporting the euro’s gains.

Additional spending expected from Germany following its historic move to loosen its fiscal rules is seen as a backstop for the eurozone in the event of a global recession.

Meanwhile, tariffs – regardless of the final levels they land on – will shrink Europe’s trade surplus with the U.S., meaning fewer revenues are being recycled into dollar-denominated assets.

Sure, it’s not clear whether the currency can sustain the breakneck pace of recent days.

Valentin Marinov of Credit Agricole SA calls the euro-dollar rate “overbought,” and the French bank’s positioning model has flipped to a short stance on the euro.

And Eric Nelson, macro strategist at Wells Fargo, warns that any further strengthening of the euro won’t be a smooth ride. A shift in reserve currency status, he says, “happens over months and quarters – not days.”

But there’s no doubt the currency has inherited part of the dollar’s traditional safe-haven role, as questions pile up about the U.S. economy and, by extension, the dollar itself.

The world finds a reasonable alternative to government bonds
The euro, once mostly seen as a risk asset, has recently been rallying on both good and bad news, according to Van Luu, global head of currencies at Russell Investments.

“I see a structural shift favoring the euro in the medium term when it comes to what qualifies as a safe haven and what doesn’t.”