The euro has been gaining steam as investors seek new havens during geopolitical turmoil. The chaotic rollout of President Trump’s tariffs has prompted investors to question long-held assumptions about the safety and stability of the U.S. dollar. In the hunt for alternatives, many have turned to the euro.
The euro has risen more than 11 percent against the dollar since the start of the year, reaching its highest level in four years at $1.18. It has also gained against other major currencies, indicating its strength is more than a reflection of the dollar’s weakness. Christine Lagarde, the president of the European Central Bank, has noted that this moment presents an opportunity for the euro to gain global clout.
“We are witnessing a profound shift in the global order: Open markets and multilateral rules are fracturing, and even the dominant role of the U.S. dollar, the cornerstone of the system, is no longer certain,” she said. The dollar’s role as the world’s reserve currency gives the United States an “exorbitant privilege.” Investors, governments, and central banks worldwide seek the safe, predictable returns of dollar-denominated assets like Treasury bonds, maintaining a robust demand for dollars. This, in turn, makes it easier for the U.S. government to borrow and boosts the spending power of American consumers.
The eurozone, consisting of 20 countries using the euro, rivals the United States in terms of size and wealth but has never attracted investors in the same way. The euro ranks second to the dollar in global use. The euro’s recent rise marks a significant turnaround from just three years ago, when investors feared damage from surging inflation and Russia’s invasion of Ukraine.
At that time, the currency union seemed at risk of crumbling. While the euro’s recovery is welcome, economists and executives warn that its strength could harm exporters.
Euro’s recent investor appeal
They are already dealing with U.S. tariffs making their goods more expensive abroad, along with increased competition from Chinese rivals in key markets. “Further euro strength is likely to be self-defeating,” said Valentin Marinov, a currency strategist at Crédit Agricole. Exports are likely to weaken and drag on the eurozone economy due to U.S. tariffs and European governmental policies promoting more imports.
The European Central Bank now faces the prospect that inflation could be too low, forecasting it to average 1.6 percent next year, below its 2 percent target. E.C.B. officials are expected to keep interest rates steady this week, but analysts speculate they might cut rates again later this year if the economic outlook darkens or the euro’s strength lowers inflation forecasts further. Some major European companies, especially in export-heavy Germany, have expressed concerns about the strong currency affecting their earnings.
SAP, a software firm, reported that every one-cent increase in the euro-dollar exchange rate results in a 30 million-euro decline in revenues. Adidas, the sportswear brand, and Daimler, a truck maker, have also noted that a strong euro negatively impacts their financial performance. Where the euro goes from here is hard to predict.
Analysts surveyed by Bloomberg expect the euro to continue strengthening to $1.21 next year. However, Mr. Marinov of Crédit Agricole believes traders may have gotten ahead of themselves and expects the euro to fall back toward $1.10 next year.
Despite the euro’s rally this year, it may not necessarily lead to a lasting shift toward the euro accounting for a larger share of central banks’ reserves or more cross-border payments. Ms. Lagarde emphasized that achieving a “global euro” would require a concerted effort to bolster the bloc’s fragmented economy, streamline its governance, and deepen its capital markets. “A step towards greater international prominence for our currency will not happen by default: It must be earned,” she said.