The euro's strengthening against the U.S. dollar isn't necessarily good news, because it could hurt European producers and exporters. Who will be hit hardest.
Donald Trump's tariffs were supposed to support the dollar, but the opposite has happened. Since the beginning of this year, the U.S. dollar has fallen by about 13% against the euro and by more than 8% against the Japanese yen. This dramatic weakening is due to the storm of economic and political changes since Donald Trump returned to the White House.
Tariff shock
It is true that The dollar has long been overvalued, and better growth prospects in Europe and Japan have also prompted investors to shift capital from the United States to other markets. But the real problems for the dollar began with Donald Trump's return to power in January, when two months later he announced his intention to impose aggressive tariffs on goods imported into the United States, including a basic tariff of 10% on goods from the European Union.
This sent shockwaves through global markets, fueling ongoing uncertainty and dampening investor appetite for American assets. The swelling US national debt, currently at a staggering 124% of gross domestic product (GDP), persistent fiscal deficits and the recent downgrade of the US credit rating by Moody's have also worried investors, sending them to the euro, yen and Swiss franc, as well as gold, which hit a record high in April.
The strong euro and tariffs are "painful" for European exporters
European producers are trying to adjust to the stronger euro. Economist Gian Maria Milesi-Ferretti, a senior fellow at the Hutchins Center for Fiscal and Monetary Policy at the Brookings Institution in Washington, believes that the combination of a strong euro and the new tariffs is very "painful" for European exporters: "Prices in dollars will most likely have to rise and European products will lose some of their market share in the US", he tells DW.
The deadline (July 9) for reaching a deal that would allow avoiding 50 percent tariffs on European imports to the US is approaching, and there has been almost no progress in the negotiations. Most EU goods are now subject to a 10 percent base tax, and steel, aluminum and cars - with a 25% tariff.
The Brussels think tank “Brugel“ recently estimated that if no deal is reached, EU exports to the US could fall by up to 1.1%. Other analysts believe that higher tariffs and a weaker dollar would be a double whammy for both American consumers and businesses.
“A large part of EU imports to the US are not final products. Machines from Germany, for example, are used to produce other goods. But if those machines become more expensive, so will the goods they produce,“ explains Torsten Beck, director of the Florence School of Banking and Finance. According to him, this scenario would lead to higher inflation in the US and lower growth, which would further put pressure on the dollar.
The pharmaceutical and automotive industries would be most affected
Last year, the EU exported goods worth nearly 532 billion euros to the US - 5.5% more than in 2023, according to Eurostat data. Pharmaceuticals account for the largest share - one in five medicines produced in the EU is exported across the Atlantic. Cars are in second place, followed by industrial and aviation machinery.
According to consultancy AlixPartners, EU countries export around 750,000 cars a year to the US - 14% of the total volume of cars produced in Europe. For companies such as Volkswagen and Mercedes-Benz, tariffs and currency fluctuations are a major problem. Meanwhile, Airbus exports around 12% of its planes to the US. The “Airbus A320 neo“, which costs around $110 million, could rise in price by $10 million due to a stronger euro, making it less competitive with Boeing's "737 MAX."
Is the euro too strong?
The US's huge debt burden will fuel the euro's upward trend. Bank of America predicts that the single European currency will rise to $1.20 by the end of 2026, and some more optimistic forecasts say the euro could rise to $1.36.
That would support European Central Bank President Christine Lagarde's vision of strengthening the euro's international role as confidence in the dollar erodes. But other senior ECB officials are concerned that the single currency is becoming too strong.
How long will the dollar stay weak?
The dollar is expected to continue to weaken this year, despite Congress passing Trump's "Big Beautiful Act," which is expected to increase the U.S. deficit by $3.1 trillion to $3.8 trillion over a decade. That could further undermine confidence in the dollar and boost other currencies like the euro and yen. The U.S. Federal Reserve is expected to keep interest rates on hold or cut them through the end of the year, reducing the appeal of dollar-denominated assets.
The dollar's decline has also raised doubts about the dollar's continued role as the world's reserve currency. More than half of the world's trade accounts are now in dollars, as are nearly 90% of foreign exchange transactions. Torsten Beck of the Florence School of Banking and Finance does not believe that the Chinese yuan can replace the US dollar, as confidence in the Chinese currency is significantly weaker.
In the next 20 or 30 years, there will not be an alternative to the dollar, but "fragmentation, with regional currencies such as the euro and the Swiss franc gradually starting to take over the role that the dollar has played so far," he says.