The euro hit its highest levels in nearly three years on Friday and many believe it will soon reclaim the $1.20 level against the dollar as the US currency continues to flounder.
While the eurozone economic recovery gathers pace, there are signs that US growth is beginning to top out.
Monetary policy should be supporting the dollar. The Federal Reserve has lifted its main Fed funds rate four times since its post-financial crisis low of 0%, including twice so far this year.
The Fed funds rate currently stands at 1-1.25% while the European Central Bank's refinancing rate remains at its post-crisis historical low of 0%.
Where's the carry trade?
Such a gap in rates often represents an opportunity for yield-hunters. Called the 'carry-trade', investors use a low-yielding currency, such as the euro with its 0% yield, to fund purchases of assets in higher-yielding currencies.
In such a scenario, one would expect the euro to be weakening as it is sold to fund purchases of dollar assets.
But investors have become wary of the carry trade in recent years following shock events such as China's renminbi devaluation in 2015 and the Swiss National Bank's pegging in 2012, then dramatic de-pegging against the euro three years later.
Such events caused massive market volatility and volatility is the nemesis of the carry trade. Months of carry-related gains can be wiped out in seconds when markets become turbulent.
The euro gained strong support in June after ECB president Mario Draghi made a speech in the Portuguese town of Sintra celebrating the central bank's triumph over deflation.
Many took the subtext of this speech to mean the ECB was ready to start withdrawing stimulus.
"When Draghi was more upbeat during the Sintra conference, suggesting that with a strengthening economy a constant monetary policy stance does actually equal a more accommodative monetary policy, markets logically saw this as a tightening announcement," says Peter Vanden Houte at ING.
Differing paths of economic growth are also supporting the euro.
While levels of annual gross domestic product growth are reasonably close: 2.6% in the US vs 2.1% in the eurozone – US growth appears to be slowing, while eurozone growth continues to expand.
"The euro’s strength against the dollar in 2017 has coincided with an improvement in the fortunes of the eurozone economy relative to the US economy," says Oliver Jones at Capital Economics.
This has fostered some changes in investor expectations over future rate policy.
While the US has made two out of four forecast interest rate hikes this year, many now believe the growth and inflation data warrant just one more rise – some believe the Fed won't make another move this year.
Conversely, as displayed in Sintra, the ECB appears to moving towards a policy tightening regime just as the Fed appears to be returning to neutral gear.
"We think that economic growth will remain strong [in the eurozone] – and that this will enable the ECB to begin tapering its asset purchases in January of next year," adds Jones.
Strength can be a weakness
But the euro's rally this year does not come without its caveats.
Eurozone inflation is weakening rapidly. Last month consumer price inflation held at June's level of 1.3%, but as recently as February it stood at the ECB's target rate of 2%.
Falling inflation sounds good for the consumer, but it can enhance disinflationary expectations, and that's bad for growth. It means consumers put off making purchases because they believe prices will fall further.
The euro's strength is fuelling the fall in inflation as a strong currency lowers the price of imported goods and services. Essentially, the eurozone is exporting its inflation.
But it will be the growth expectations over the coming months that dictate the currency's performance, unless the ECB becomes concerned about the euro's strength and its possible negative impact on growth.
While a strong currency promotes cheaper imports, it makes exports more expensive. The central bank could intervene to weaken the euro if its strength becomes an unbearable burden on corporate earnings.
"One should remember that Draghi’s predecessor, Jean-Claude Trichet, several times tried to stop the euro’s appreciation by stating that brutal currency moves were most unwelcome," says Houte.
On August's non-farm payrolls Friday, a larger than expected rate of job creation in the US fuelled a particularly strong rally for the dollar. It gained more than 1% against the euro.
Yet, the euro remains 10.5% higher against the dollar since the start of the year. It is the best performing of the G10 currencies in 2017 and looks well set to hold on to these gains.