BENGALURU:
The euro has emerged as a surprise winner of the recent tariff-induced market turmoil, confounding the earlier consensus by surging to a three-year high against the dollar as Europe proves a relatively safe bet amid the global chaos.
Driving the currency’s move is global investors’ growing nervousness about owning US assets, causing them to sell and move money back home. In Europe, the flows are boosting the euro. “Money flows have become vastly bigger than trading flows,” said Kit Juckes, chief FX strategist at Societe Generale.
“If the US government causes equities to fall and reduces the profitability of US companies, we should ask ourselves whether the rest of the world still wants to put all of its money in American bonds or equities.” The euro has gained more than 5% on the dollar since April 1, the day before US President Donald Trump introduced new 10% baseline tariffs on all economies and slapped duties totalling 20% on the European Union.
Trump’s decision to pause the higher levies for 90 days on Thursday fuelled the biggest single-day jump in the euro since 2015. By Friday it had hit a three-year high above $1.14, building on the rally that had started weeks earlier after Germany announced a massive spending plan.
While policymakers in the region are talking up their currency as a global player, becoming a currency of choice could hurt European exporters which have benefited from a cheaper euro during global economic slowdowns, analysts warn.
Its strength has been broad, hitting a 17-month high versus Britain’s pound and trading around 11-year highs on China’s yuan, which has taken it to a record on a trade-weighted basis.
Safe havens like the Japanese yen and Swiss franc have also strengthened. But unlike those currencies, the euro normally weakens against the dollar in times of stress.
What’s more, at the start of the year, the euro was trading around $1.03, and analysts then expected it to fall below $1 if tariffs were imposed. These bets are now being dramatically reassessed.
Repatriation
There is plenty to sell. Foreign holdings of US assets had surged to $62 trillion in 2024 from $13 trillion a decade earlier as international investors flocked to outperforming American stocks, bonds and real estate.
The euro area accounts for the biggest share of foreign ownership of US assets when broken down by currency, according to data from Adam Pickett, Citi’s head of global macro strategy. “I think this story can run as long as the reallocation runs,” he said, drawing comparison with late 2022, when European stocks outperformed the S&P 500 for around six months and the euro gained around 10%.
“Then there are lots of pie-in-the-sky type discussions around whether the isolationism and lack of trust in US institutions means, longer-term, people are less confident in holding on to US assets. That’s a much more difficult story to map out.” There are indeed many moving parts in very volatile markets and not everyone agrees on how things will develop.
“A shift out of US assets in a secular long-term sense is not something that can be engineered in a week,” said Lefteris Farmakis, senior FX strategist at Barclays. Instead, traders were re-evaluating their earlier view that the euro would be among the harder-hit currencies from tariffs, he said, and this accounted for the strength of the rally.
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