US President Donald Trump precipitated a rout in The Dollar ( USD ) on Tuesday, which pushed the EURUSD above the key 1.2000 handle. The greenback had the worst single-day performance since last year’s “Liberation Day” tariff announcement, falling to a 4-year low. The sudden move sounded alarm bells in Frankfurt, with the ECB set to decide on monetary policy next week.
It’s long been speculated that Trump wanted a weaker dollar, and his comments in Iowa on Tuesday were taken as confirmation. After the dollar had been trending lower for a couple of weeks, a reporter asked his views on the situation. He responded by saying The Dollar ( USD ) was doing great, seemingly giving the green light for the US currency to decline. Previously, traders had thought that the White House might defend the currency if it got too weak, and the comments removed that support.
The Rise in the Euro
The move was just the latest reaction to a broader trend that began with the surprise of the tariffs back in April of last year. Central banks are moving to use the Euro more as a reserve currency at the expense of the dollar, citing fiscal policy uncertainty. Central banks are reportedly looking to boost their euro reserves from the current 22% to 25% by the end of the decade. This vote of confidence in the shared currency could help it appreciate over the long term.
The immediate market reaction to the drop in The Dollar ( USD ) was to pile into safe havens. Gold rose to new record highs above $5,200 per ounce, and the Swiss franc hit highs not seen in ten years. But the Euro constitutes the largest component of the dollar index basket at 58%, and could therefore be the primary beneficiary.
What Comes Next
The upcoming data release could be pivotal for the Euro’s evolution. Many investors are wary of the US economy and have been buying Euro-denominated assets, hoping that the European economy will outperform. Both European and US stock markets are near record highs, but the American stocks have significantly higher valuations. This means investors may see greater value in the Euro and continue buying it.
However, that supposes that the EU economy will remain resilient. Preliminary Q4 GDP figures for the Eurozone are expected on Friday, with consensus pointing to a cooling to 0.2% quarterly growth from 0.3% in Q3. A slower economy would also complicate matters for the ECB, which could further weigh on the Euro.
ECB Sounding the Alarm
Immediately after the dollar’s drop, ECB officials warned that the rapid appreciation of the Euro could cause problems. In particular, it could lower inflation, and the Eurozone is already expected to have inflation below its target. Economists had been predicting that the ECB would stay on the sidelines, as inflation remained under control and it could tolerate a small undershoot.
But a strong currency would make European exports more expensive, potentially weighing on the economy. Cheaper imports would also weigh on inflation. This means consumer price growth could fall far enough below target that the ECB will have to act, which would also weigh on the Euro. With Trump slated to appoint a dovish Fed chair, the ECB could find itself forced into a “race to the bottom” on rates, generating substantial volatility in the Euro.
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