Europe may dial back support for dollar after US tariffs — Bloomberg
Donald Trump (photo: Getty Images)
Harsh US trade rhetoric toward European countries amid the situation around Greenland could affect global financial flows and the balance of power in currency markets, potentially strengthening the European currency, according to Bloomberg.
Risks for the dollar and Europe’s role
Trade threats by US President Donald Trump against European governments are increasing the likelihood that EU countries will reconsider their investment policies.
This includes the possible reduction of European holdings of US assets, which analysts say could support the euro. This view was expressed by George Saravelos, Global Head of FX Research at Deutsche Bank, in comments to Bloomberg.
Scale of European investment
Europe remains the US's largest creditor. Countries in the region hold around $8 trillion in US bonds and equities - almost twice the combined total held by all other countries worldwide. This makes financial relations between the EU and the US particularly sensitive to political decisions.
Geoeconomic implications
According to Saravelos, amid serious shocks to the geoeconomic stability of the Western alliance, it is becoming less obvious why European countries should continue to act as a key creditor to the US.
“In an environment where the geoeconomic stability of the western alliance is being disrupted existentially, it is not clear why Europeans would be as willing to play this part. Developments over the last few days have potential to further encourage dollar rebalancing,” the analyst said.
Market reaction
Another factor could be stronger political consolidation in Europe in response to new US tariffs linked to Greenland. This suggests that any pressure on the euro against the dollar may be short-lived.
At the start of the week, the single currency weakened, but later rebounded by 0.2% to trade at $1.1619. Meanwhile, futures on US and European stock indices declined.
Financial interdependence
The analyst also stressed that, against the backdrop of the US’ record-low net international investment position, financial interdependence between European and US markets has reached an all-time high.
“With the US net international investment position at record negative extremes, the mutual inter-dependence of European-US financial markets has never been higher. It is a weaponization of capital rather than trade flows that would by far be the most disruptive to markets,” he predicted.
US President Donald Trump said during a recent conversation with UK Prime Minister Keir Starmer that the information he had received about the purpose of deploying European troops in Greenland may have been inaccurate, and that this factor influenced his decision to impose tariffs on certain countries.
US authorities have also explained that their focus on Greenland is seen as part of the country’s long-term national security strategy and is directly linked to developments in Europe and the Arctic, as well as the ongoing war in Ukraine.
