By Naomi Tajitsu and Vassilis Karamanis

(Bloomberg) -- The euro is heading for its best week in more than a year after investors pared back expectations for interest rate cuts and bet that US trade tariffs won’t come into force as soon as previously feared.

Most Read from Bloomberg

• What Happened to Hanging Out on the Street?

• How Sanctuary Cities Are Preparing for Another Showdown With Trump

• Billionaire Developer Caruso Slams LA Leadership Over Wildfires

• Texas HOA Charged With Discrimination for Banning Section 8 Renters

• Hoboken PATH Station Will Close for Almost a Month on Jan. 30

The common currency is on track to strengthen around 2% against the dollar, its biggest gain since July 2023. Part of the move can be attributed to the dollar, which is heading for its worst week in 14 months against a basket of major currencies.

The weekly gain marks a reversal of a slump in the currency since September, driven in large part by concern that Donald Trump would target Europe with tariffs after his January inauguration. Instead the new US president has focused his immediate attention on Mexico and Canada, with penalties on Europe expected further down the line.

“The fact that Trump has not immediately implemented tariffs against Europe or other trading partners has helped to partially revert the euro bearish move,” said Roberto Cobo Garcia, head of G10 FX strategy at BBVA, who expects the rebound to continue in the near term. “Valuations, technicals, positioning and market pricing for the European Central Bank all suggest the euro short is a bit overdone.”

A stronger-than-expected German PMI reading propelled the euro higher on Friday, pushing the two-year German bund yield to its highest level in a week and prompting traders to pull back rate cut bets. Markets are now pricing around 90 basis points of monetary easing from the European Central Bank this year, compared with 86 basis points on Thursday.

Concern that trade restrictions would worsen the euro zone’s economic slowdown, resulting in deeper rate cuts, had prompted hedge funds and other speculators to raise bets against the euro to the highest level in around three years, according to CFTC positioning data.

So-called risk reversals in the options market haven’t followed spot price this week, implying that traders still prefer to own dollar-bullish exposure versus the euro.

Most Read from Bloomberg Businessweek

• Forget Factories, Small US Towns Want Buc-ee’s Gas Stations

• How Kendrick Lamar Turned Beef With Drake Into Music Superstardom

• Elon Musk’s Inaugural Highs (and Lows)

• Greek Police Say Eggs Were Stolen from IVF Clinic Patients

• Walgreens Replaced Fridge Doors With Smart Screens. It’s Now a $200 Million Fiasco