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(Bloomberg) -- The euro’s surge is vindicating the handful of strategists who argued against calls for the single currency to fall to parity with the dollar.

Morgan Stanley, Credit Agricole SA and Commerzbank AG are among the banks who defended the euro’s prospects, opposing a view in markets that was popular as recently as last month that it would soon slump to be worth only one dollar. Now it’s rallied over 4% this week alone to above $1.08, a turnaround after nearing $1.01 just a month ago.

“The big change this week is that the euro is finally back in the game,” said Michael Pfister, a currency strategist at Commerzbank. “The market has just moved a little faster in our direction than we expected, so it’s a small win.”

The euro’s jump puts it on track for the best weekly gain versus the greenback since 2020, following Germany’s and the European Union’s pledges to ramp up defense and infrastructure spending.

Hedge funds are now buying options that the currency could even hit $1.20 in six months’ time, whereas some investors were previously betting on it weakening below $0.95.

Plenty of others have been forced to capitulate to the currency’s about-turn. Banks including Goldman Sachs Group Inc. and Mitsubishi UFJ Financial Group Inc. have abandoned predictions that one euro will buy one dollar this year, which had been fueled by expectations the US would hit Europe with trade tariffs and that the interest-rate gap between the two would widen.

The strategists who stayed positive are not getting carried away now. Morgan Stanley at the start of the year saw the possibility of a jump to $1.08 — a move that has played out — while Commerzbank and Credit Agricole have been predicting $1.07 by the end of 2025.

There are plenty of reasons to bet on further gains. The euro extended its rally Thursday after the European Central Bank indicated its interest-rate cutting phase may be drawing to a close as inflation cools. That led money markets to trim wagers on further moves and they now favor less than two more cuts by year-end, a dynamic that could support the common currency.

“The euro is higher as the rates markets are once again forced to reassess their dovish outlook for the ECB,” said Valentin Marinov, Credit Agricole’s head of FX strategy, who now sees the possibility of it trading between $1.08 and $1.10 in the next six months.

The euro could also benefit from any reassessment of reserve currencies by the world’s central banks as Europe grows more united over funding its own defense, according to analysts at UBS Investment Bank, a unit of UBS Group AG.

Hefty defense spending could offer a lift to the euro-zone economy, said Credit Agricole’s Marinov, adding that a potential end to the war in Ukraine would likely prompt a further fall in global energy prices that would also help the region. That said, he also sees a risk that the pace of gains could slow in the near term.

“The squeeze of the substantial market shorts seems to have run its course,” he said. “We also believe that many negatives are in the price of the dollar by now given that the markets are already pricing in three Fed cuts in 2025.”

Overall, analysts surveyed by Bloomberg see the currency ending the year lower at $1.05, with some banks having published forecasts for parity or below.

--With assistance from Greg Ritchie.

(Updates with ECB details.)