The euro is soaring — and Trump's policies could push it even higher

Central bankers and strategists anticipate the euro will further strengthen against the U.S. dollar, propelled by concerns over U.S. political and fiscal stability, including tariff policies and increasing federal deficits. The euro has already gained approximately 14% against the dollar in 2025, despite ECB rate cuts, as investors reassess U.S. rule of law and foreign demand for dollar assets wanes. While not poised to immediately displace the dollar as the primary global reserve currency, the euro is increasingly viewed as a stable alternative, with potential for greater international reserve status contingent on EU integration efforts like the Banking and Capital Markets Union.

Analysis

The euro is exhibiting a structural strengthening against the U.S. dollar, a trend supported by both European central bankers and market strategists. This shift is primarily fueled by mounting concerns over U.S. fiscal and political instability rather than traditional monetary policy divergence. The euro has appreciated approximately 14% against the dollar so far in 2025, even as the European Central Bank has cut interest rates while the Federal Reserve has held steady. Key drivers for dollar weakness include escalating U.S. federal deficits following recent tax legislation, political pressure on the Federal Reserve, and investor unease over a perceived weakening of the rule of law, as cited by ECB officials Yannis Stournaras and Gabriel Makhlouf. Concurrently, strategists from Deutsche Bank note that foreign investors are reducing their purchases of U.S. assets, creating a financing gap for the U.S. current account deficit. While the euro is not expected to immediately usurp the dollar's primary reserve status, its role as a stable alternative is growing, with its share of global reserves potentially increasing from its current level of around 20%. This momentum is supported by anticipated euro-denominated borrowing for projects like NextGenerationEU and could be further solidified by the completion of the EU's Banking and Capital Markets Union.

Key Decisions for Investors

• Investors should consider maintaining or increasing long EUR/USD exposure, as the drivers of dollar weakness—U.S. fiscal imbalances and political uncertainty—appear to be structural rather than cyclical.
• Monitor progress on the EU's Banking Union and Capital Markets Union, as successful integration is a key catalyst cited for enhancing the euro's global reserve appeal and could sustain its long-term strength.
• Holders of significant U.S. dollar-denominated assets should evaluate currency hedging strategies to protect against further depreciation driven by waning foreign demand for U.S. debt and equities.
• Closely watch for developments in U.S. trade tariff negotiations and any forward guidance suggesting an earlier-than-expected Federal Reserve interest rate cut, as these events could accelerate the dollar's decline.