Yeah I agree, it's a very notable divergence between the sentiment and the price performance. I found it especially interesting that the move from 1.25 to 1.50 was viewed by the bears as confirmation of the bear thesis - when as you point out, it had not even made new lows. You would expect a "collapsing" asset to at least be able to make a new low when bearishness runs rampant.
Another interesting factor is how long the bearishness has gone on for, and how consistent it has been. This reminds me of the bearishness on gold and commodities in the late 90s and early 2000s, and the bearishness in the first years of the Euro - the mainstream view was really relentlessly bearish for *years*, not just a few weeks or months. This is the kind of multi-year bearishness you see at the beginning of secular bull markets of 7-10 years or more. Of course these "bottoms" can last for years, so the sentiment alone isn't reason to buy - but this time we now have an uptrend in the dollar as a kind of catalyst, along with clear negative structural fundamentals and newsflow in currencies like the Euro and Pound.
If a similar pattern occurs this time, then the more recent lows in the dollar (1.51 Euro) should definitely hold, and we can then expect a multi-year rally that eventually ends with massive dollar bullishness and huge price gains. Short-term the bearishness on the Euro has got a little high, and price has fallen quite far in a short time period, so a pullback of some kind would not surprise me, maybe to 1.40-42. In the longer-term, if this dollar bull market thesis is correct, then we should see a move significantly beyond the 2008 highs of 1.25.
That said, I am not sure the Euro is the best currency to short against the dollar. The pound to me looks even more vulnerable over the long-term. I could imagine both pound and euro reaching parity in the next 3-5 years. That would be a 37% gain for Euro shorts, but a 50% gain for pound shorts from current levels.
