"Trump undermines confidence in the rationality of American policy": investors are retreating from the US dollar in response to Trump's aggressive tariff policy. Is this the euro's finest hour?
The euro has appreciated by more than 10% against the US dollar since January, reaching $1.14 per euro. While the euro's gains are largely due to the flight from the dollar due to Donald Trump's protectionist policies, the strength of the common European currency also reflects growing confidence in the eurozone economy.
How the euro is becoming a safe haven
The eurozone is currently recovering from a mild recession in 2023: last year, the 20 countries in it achieved average growth of 0.8%, and forecasts for 2025 indicate growth of around 1.3%. But looming US tariffs on imports from the European Union may derail this outlook.
In anticipation of a European recovery against the backdrop of economic uncertainty in the US, many foreign investors are switching from dollar positions to European stocks and bonds, which further strengthens the value of the euro.
The euro's strength is also due to differences in monetary policy. The European Central Bank (ECB) has cut interest rates several times in response to stubborn inflation in parts of the eurozone, while the Fed has kept interest rates higher for longer, which has led investors to prefer the single currency.
Still: large currency fluctuations of 10% in just a few months are relatively rare, and the euro is increasingly seen as a counterweight to the dollar in these turbulent geopolitical times, when fears are growing that Trump's tariffs could push the US economy into recession.
"Trump is undermining confidence in the rationality of American policy, in the long-term prospects for US growth and in the sustainability of its public finances," Holger Schmieding, chief economist at Berenberg Bank, told DW. "As a result, the dollar loses some of its value, but the euro is not a real alternative", the expert adds, drawing attention to the damage that Trump's trade policy could cause to the global economy. According to him, this "could weigh on growth in the eurozone and force the ECB to respond with further interest rate cuts".
According to estimates by Oxford Economics, if Trump imposes a 20% tariff on EU exports, growth in the eurozone could decrease by up to 0.3 percentage points this year and next. The forecast assumes that Brussels will respond with targeted countermeasures on US goods, rather than full-scale retaliation.
Germany's €1 trillion stimulus boosts confidence
In Germany, a massive spending package for defense, infrastructure and climate protection approved by the Bundestag earlier this month includes a significant fiscal stimulus of €1 trillion over the next decade. The news has further boosted investor confidence in the euro - as it is a sign of long-term economic support at the heart of the eurozone, it contributes to the strengthening of the common currency.
A large part of the German spending will be financed through new bonds, which raises yields and attracts foreign investors. Commerzbank, Germany's second-largest lender, predicts that the country's debt ratio could rise to 90% of gross domestic product (GDP) over the next decade, making euro-denominated assets more attractive.
"Additional public borrowing will make German short-term bonds a little more liquid and therefore more attractive," says expert Holger Schmieding.
Last month, Goldman Sachs predicted that the massive stimulus would boost Germany's GDP by a full percentage point next year and boost eurozone growth by 0.2 percentage points. The bank's chief economist, Sven Jari Sten, cites two reasons for this: the hope that stronger growth in Germany will spill over to neighboring countries, and the expectation that the rest of the eurozone will increase its military spending more quickly in response to Germany's request.
France, Italy and Spain are expected to increase defense spending to around 3% of GDP over the next two years.
Given the ambitious military spending plans, Rebecca Christie, a senior fellow at the Brussels-based think tank Bruegel, supports the idea of issuing Eurobonds.
"Joint bonds are a powerful tool that deserves to be used more actively. A follow-up program to the post-pandemic recovery plan would raise money and encourage the world to trade in euros," the expert believes.
Christie, who has also worked at the ECB, is referring to the €750 billion stimulus package. euro, launched after the pandemic, more than half of which was financed through joint bonds - an unprecedented move by the EU.
The issuance of eurobonds is supported by the southern EU countries, while the northern members of the community, including Germany, are against it.
Pros and cons of a stronger euro
The current strength of the single currency is currently beneficial for consumers and businesses, who can buy American products at lower prices - although many Europeans are boycotting American goods because of Trump's aggressive trade policies. Tourism in the US has also become cheaper for Europeans, and dollar-denominated goods such as oil and gas have become more accessible.
This is a welcome relief for eurozone producers, who are still struggling with higher energy prices due to Russia's full-scale invasion of Ukraine. Rebecca Christie believes that European airlines and the military could also benefit from cheaper prices for new planes, which are bought in dollars.
"At the same time, some European exporters may feel the effect of higher prices for their goods to the rest of the world," Bruegel's representative added. Germany is considered most vulnerable to a strong euro, as exports accounted for about half of its GDP last year. The stronger currency makes German cars, machinery and chemicals more expensive at a time when Europe's largest economy is struggling with high energy prices, weak global demand and strong competition from China.
While some currency traders predict that the euro could continue to strengthen against the greenback until the end of the year, most major investment banks predict that it will hover around its current levels. "Everything is extremely uncertain at the moment and it is unclear whether the euro will continue to appreciate against the dollar", says Rebecca Christie of the Bruegel think tank.