Currency market fluctuations, is the weak dollar a risk for Europe?
The US dollar continues to lose value against other major currencies, following the trend of 2025. Last year, the US currency recorded its strongest loss in almost a decade. The minus against a group of other currencies in 2025 amounted to about 10 percent. Since the beginning of 2026, the decline has been another minus 2.6 percent.
The dollar's decline has implications for the euro and other currencies. The single European currency has reached $1.20 for the first time since 2021. The British pound and the Japanese yen have also risen against the dollar to record highs. Some economists and analysts attribute the dollar's continued decline to a lack of investor confidence in the US currency, as the unpredictability of President Donald Trump's policies continues to cause concern. There is another view, according to which Trump himself and many members of his economic team want the dollar to weaken in the hope that US exports will be priced more favorably and thus increase competitiveness. Trump has not tried to refute this speculation. On the contrary, when asked this week if he is worried about the weak dollar, he replied: "No, that's a good thing."
Stephen Miran, former chief of staff to Trump's economic advisers and now a member of the board of governors of the US Federal Reserve Bank, published a "Guide to Restructuring the Global Trading System" in November 2024. Tariffs and dollar depreciation were presented as important instruments to reduce the US trade deficit.
Given the current exchange rate and the strengthening of the euro against the dollar, according to experts, intervention by the European Central Bank is not yet necessary. Photo: Frank Rumpenhorst/dpa Themendienst/picture alliance
Why does this affect Europe?
The weakening dollar is not only affecting the US economy, but also has consequences for the eurozone economy and the euro. The common currency has gained 13 percent against the dollar in 2025 - the strongest increase since 2017.
The strengthening of the euro plays "an important role for economic performance, the labor market and the financial position of budgets" in the EU, says Jack Allen-Reynolds, deputy chief economist for the eurozone at Capital Economics.
"A stronger euro reduces the competitiveness of exports, which hurts producers in the region," Allen-Reynolds tells DW. "On the other hand, imports are cheaper, which leads to lower prices for consumers."
Ricardo Amaro, chief economist for the eurozone at Oxford Economics, draws attention to the fact that a further increase in the euro against the dollar could increasingly affect the competitiveness of European companies that export to the US.
This is indeed offset by the favorable price of US products in Europe, according to Amaro. But overall, the current exchange rate, if it remains like this, would have a negative effect on economic growth in Europe.
"According to our calculations, the eurozone's gross domestic product this year would be around 0.2 percent lower if the euro-dollar exchange rate remained at the current level (1.20 USD), instead of the 1.16 USD rate that served as the reference point in the EU-US trade agreement at the end of July," Amaro tells DW.
Should the ECB intervene?
The euro's rise against the dollar has fueled speculation about whether the European Central Bank will need to intervene. Martin Kocher, governor of the Austrian Central Bank, considers the euro's current rise to be "moderate." If the euro's value continues to rise, the ECB will have to intervene.
The ECB is already trying to influence market expectations, with senior ECB officials saying they are "monitoring the situation and expressing reservations about recent developments," says Ricardo Amaro. "This raises the issue of cutting interest rates to curb the euro's rise."
Jack Allen-Reynolds also believes that there is no need to intervene at the current level of exchange rate movements. But he believes that further changes could prompt the ECB to lower interest rates later this year.
Meanwhile, Zsolt Darvas argues that the current consequences related to inflation are almost zero and no sector is particularly sensitive. "Exchange rates have fluctuated strongly in recent decades. Businesses are prepared to cope with even stronger fluctuations than those we are currently seeing," Darvas estimates.
Arthur Sullivan, DW
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