The euro has unexpectedly emerged victorious amid the tumultuous market conditions triggered by international tariffs, defying earlier predictions and surging to a three-year high against the dollar. This rise is largely attributed to increasing apprehension among global investors regarding U.S. assets, which has led to significant capital repatriation to Europe, thus strengthening the euro.
Kit Juckes, chief FX strategist at Societe Generale, noted that the scale of money flows has surpassed trading flows. He questioned whether the mounting losses in U.S. equities would deter global investors from maintaining substantial investments in American bonds and stocks.
Since April 1, when U.S. President Donald Trump implemented new tariffs on various economies, the euro has appreciated over 5% against the dollar. Trump’s recent decision to delay imposing higher tariffs for 90 days triggered the largest single-day euro rally since 2015, with the currency climbing above $1.14.
While officials in the eurozone are promoting the euro’s stature as a global currency, there are concerns regarding potential adverse effects on European exporters, who have benefitted from a weaker euro during global economic downturns. The euro’s current strength has been marked by a 17-month high against the British pound and gains near an 11-year peak against the Chinese yuan.
Unlike traditional safe-haven currencies such as the Japanese yen and Swiss franc, the euro typically depreciates during economic stress. In terms of foreign holdings, U.S. assets have seen a remarkable increase, climbing from $13 trillion a decade ago to $62 trillion in 2024.
According to Citi’s Adam Pickett, the eurozone accounts for a significant portion of these foreign investments, raising questions about the long-term confidence in holding U.S. assets amid increasing isolationism and distrust in U.S. institutions. As traders reassess their positions on the euro, the trajectory remains uncertain.
Lefteris Farmakis from Barclays emphasized that significant shifts in asset allocation cannot occur overnight. The evolving market dynamics also reflect a growing skepticism towards U.S. debt, marked by a widening yield gap between German and U.S. bonds.
Francois Villeroy de Galhau of the European Central Bank acknowledged that U.S. policies have dented confidence in the dollar, demonstrating the importance of the euro in today’s financial landscape. Analysts suggest that the euro could continue to rise, potentially reaching $1.25, creating a complex situation for European economies.
While stronger euro-denominated debt may facilitate additional government spending, it poses risks for exporters who traditionally benefit from a weaker euro during downturns, potentially exacerbating challenges for European markets.