The euro's decline raises alarms over potential impacts of US tariffs on EU exports
The euro has recently experienced a significant decline, hitting its lowest level against the pound in two years. This downturn has raised concerns regarding the eurozone’s economic stability, particularly in light of the potential risks associated with a global trade war.
As of now, the single currency has dropped by 0.2% against sterling, reaching a low of 82.8 pence, a level not seen since April 2022. This decline is compounded by a broader drop of approximately 1.5% since the election of Donald Trump as the President of the United States.
Impact of US tariffs on EU exporters
Donald Trump’s administration has signaled a willingness to impose tariffs on foreign goods entering the US market, which could have dire consequences for EU exporters. The prospect of tariffs has created a climate of uncertainty, leading to a slump in the euro’s value against the dollar as well. Reports indicate that Robert Lighthizer, a former US Trade Representative known for his hawkish stance on tariffs, is set to join the Trump administration, further heightening concerns among European markets.
Althea Spinozzi, an economist at Saxo, highlighted the urgency of the situation, stating, “Trump has the executive power to impose tariffs on countries from his first day in office, so from January, these tariffs could be in place and the cost passed on to consumers.” This potential shift in trade policy could exacerbate existing economic challenges faced by Europe, particularly as China has announced temporary anti-dumping measures on EU brandy imports in retaliation for tariffs on its electric vehicles.
Political uncertainty in Europe
Adding to the euro’s woes is the political uncertainty in Germany, the eurozone’s largest economy. Chancellor Olaf Scholz has indicated a willingness to call a vote of confidence before Christmas, which could lead to snap elections following the collapse of his governing coalition. Such instability could further undermine investor confidence in the euro and the broader European economy.
Despite these challenges, there is a glimmer of hope as the cost of government borrowing has decreased across the UK and Europe. This decline suggests that fears regarding the impact of a Trump presidency may be subsiding. Mohit Kumar, chief economist at Jefferies, commented, “We do not see Republican policies as that bad for the US deficit picture as feared by the market.” This perspective may provide some reassurance to investors as they navigate the complexities of the current economic landscape.
Looking ahead
As the euro continues to face pressure from both external trade policies and internal political dynamics, market participants will be closely monitoring developments in the coming months. The interplay between US tariffs and European economic resilience will be crucial in determining the euro’s trajectory against the pound and other major currencies. Investors and policymakers alike must remain vigilant as the global economic landscape evolves.
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