The U.S. Dollar's Resurgence: Capitalizing on the Weakening Euro and Yen

The U.S. Dollar has entered a new phase of dominance, with the euro and yen under sustained pressure. As of September 28, 2025, the USD/EUR exchange rate stood at 0.8544, while the USD/JPY rate hit 150.61, reflecting a 12% and 15% appreciation against the euro and yen, respectively, compared to early 2025 levels, according to Dai-ichi Life's September 2025 outlook. This resurgence is not a short-term fluctuation but a structural shift driven by divergent macroeconomic trajectories across the U.S., Eurozone, and Japan.

U.S. Macroeconomic Fundamentals: A Magnet for Capital

The Federal Reserve's policy trajectory and inflation dynamics have positioned the dollar as a safe haven. The FOMC SEP forecasts a federal funds rate of 3.6% in Q4 2025, down slightly from 3.9% in June but still above the Eurozone's 2% and Japan's near-zero rates. Meanwhile, core PCE inflation is expected to remain at 3.1% in 2025, a level that, while above the Fed's 2% target, is seen as transitory compared to the Eurozone's sticky 2% headline inflation, according to the SEP. This combination of relatively high rates and controlled inflation has made U.S. assets more attractive to global investors seeking yield.

Eurozone Stagnation: A Perfect Storm

The Eurozone's economic outlook is clouded by structural weaknesses. ECB staff projections forecast real GDP growth of 1.2% for 2025, but J.P. Morgan Research has downgraded its forecast to 0.9% due to U.S. tariff hikes and energy price volatility, according to Dai-ichi Life. Inflation, while stabilizing near the ECB's 2% target, remains a drag on consumer spending. The ECB's key interest rate is expected to remain at 2% through 2026, with J.P. Morgan anticipating a series of rate cuts to 1.5% by mid-2026, per Dai-ichi Life. This dovish stance, coupled with weak growth, has eroded confidence in the euro as a reserve currency.

Japan's Precarious Rebound

Japan's economy, once a beacon of post-pandemic recovery, now faces headwinds. Q3 2025 GDP is projected to contract at an annualized rate of -1.7% due to U.S. tariffs and a slowdown in residential investment, according to the SEP. While the IMF forecasts a rebound to 1.2% growth in 2025, this optimism is tempered by the Bank of Japan's (BoJ) continued accommodative policy. With inflation converging toward the BoJ's 2% target in late 2025, the central bank has shown no urgency to normalize rates, leaving the yen vulnerable to carry-trade unwinds and capital outflows, as noted by Dai-ichi Life.

Strategic Implications for Investors

The dollar's strength offers both opportunities and risks. For investors, hedging against currency risk in euro- and yen-denominated assets is critical. Conversely, increasing exposure to USD-denominated equities and bonds-particularly in sectors like technology and industrials-can capitalize on the dollar's purchasing power. Emerging markets with strong dollar-linked commodity exports (e.g., Brazil, Australia) may also benefit from a weaker euro and yen.

However, caution is warranted. A faster-than-expected Fed rate cut cycle or a surprise Eurozone recovery could reverse the dollar's momentum. Investors should monitor the FOMC's December 2025 meeting and the ECB's response to inflation data in Q1 2026.