EU exports face double threat from US tariffs and robust euro

Alongside US President Donald Trump’s tariffs, a strong euro is making the future even gloomier for European exporters.

Following the tariffs, the relative weakness of the dollar has also added to the woes of EU exporters, who had hoped a strong dollar would cushion the blow of tariffs by making their goods cheaper relative to American exports.

Sander Tordoir, chief economist at the Centre for European Reform, told Euractiv, “This has been a double whammy for Europeans exporting to the US, because not only were they hit by tariffs, but the balancing effect that a dollar appreciation against the euro would normally provide did not kick in; on the contrary, the opposite happened.”

A European exporter dependent on the US market is therefore feeling both negative effects, and the situation is worsening.

Weak dollar puts European automotive exports in difficulty

According to the European Commission, the EU exported €531.6 billion worth of goods to the US last year, of which €380 billion (about 70% of total exports) are subject to Trump’s tariffs.

The tariffs include 25% duties on steel, aluminum, and automobiles, as well as a 10% “base” tariff on most other goods.

Although exporters often hedge against currency fluctuations to protect their revenues, industry groups are increasingly voicing their concerns about the impact of the dollar’s depreciation on European companies.

Manuel Kallweit, chief economist at the German automotive industry group VDA, said, “The weakness of the dollar is adding to the pressure already created by tariffs and could weaken profitability,” adding that the US was the “most important sales market” for German car exporters last year.

According to the German Federal Statistical Office, the US market accounted for 13.1% of Germany’s total 3.4 million vehicle exports in 2024.

Measuring the impact of the strong currency is difficult for now

Kallweit’s statements were echoed by European alcohol exporters, who are heavily dependent on US demand. According to Eurostat, about 30% of all EU alcohol exports were sold to America last year, with €4.9 billion worth of wine and €2.9 billion worth of spirits and liqueurs sent across the Atlantic.

A spokesperson for CEEV, the lobby group representing EU wine producers, said the current euro-dollar exchange rate of $1.13 is in the middle of the $1.03-$1.25 range seen over the last decade, but it is still at a level that affects the EU’s competitiveness.

“At today’s exchange rate, the value of the euro will have less impact than tariffs, but it is making the situation worse,” the spokesperson said.

SpiritsEurope similarly stated that a strong euro would have a “mechanical effect” on exports. However, the group’s spokesperson said it was “impossible” to know whether the currency’s appreciation would have as severe an impact as Trump’s tariffs, as it is not known what the tariffs will be, adding that tariffs also affect the euro-dollar exchange rate.

The spokesperson also noted that the bloc’s spirits exporters have previously “lived and managed” with exchange rates as high as $1.5.

Prospect of US recession, interest rate cuts, and a new ‘Plaza Accord’

According to analysts, the long-term strength of the euro, and thus its impact on EU exporters, will ultimately depend on a number of factors.

The first of these is whether Trump’s tariffs will lead to a recession in the US. In such a scenario, the US Federal Reserve (Fed) would be forced to cut interest rates more quickly than the European Central Bank (ECB), which would further weaken the relative value of the dollar.

The second is whether there will be a “Mar-a-Lago agreement,” similar to the 1985 Plaza Accord, aimed at reinforcing the dollar’s weakness in the global financial system.

Could money flow out of US bonds and into Eurobonds?

But perhaps the most important factor is the possibility of intensified “de-dollarization,” with other major central banks and investors reducing their investments in dollar-denominated assets like US Treasury bonds.

Carsten Brzeski, global head of macro at ING research, said the process of moving away from the dollar’s influence will largely depend on how “attractive” an alternative the euro becomes against the dollar.

Brzeski stated that if EU policymakers deepen the capital markets union and issue more safe assets denominated in euros, such as Eurobonds, investors would be more willing to move away from the dollar.

“Otherwise, Europe or the Eurozone will not have the capacity to absorb all the capital in the financial markets,” Brzeski said, adding that as long as Europe cannot absorb this money, “there will not be a more prolonged weakening of the dollar.”

But many analysts are confident that the euro’s strength will continue. Deutsche Bank noted in a recent report that the dollar’s recent decline could be “the beginning of a slow downward trend.”

“Recent policy and market volatility is concerning enough to warrant a rethink on investing in the US,” the bank said.

The upside of a strong euro: Disinflation

Analysts and EU officials have also highlighted the positive effects of a strong euro. Brzeski noted that, in particular, by lowering import prices, it alleviates inflationary pressures, and the slowdown in price increases could give the ECB room to cut interest rates, thereby stimulating the private sector.

Brzeski’s comments were echoed on Monday by European Commissioner for Economy Valdis Dombrovskis, who described the strong currency as a “double-edged sword.”

Dombrovskis said, “The strengthening of the euro has positive aspects because it has disinflationary effects… but it can also negatively affect EU exports.”

The euro’s appreciation also contributed to Brussels’ decision on Monday to lower its inflation forecast for the Eurozone next year from 1.9% to 1.7%, a forecast that falls further below the ECB’s 2% target rate.

Euro’s firm stance could make competition with China difficult

While some analysts pointed to its disinflationary effect, they also warned that the euro’s strength could harm the EU’s competitiveness against China.

The euro has gained more than 7% against the renminbi since January, hindering the ability of EU industries to compete with increasingly competitive Chinese rivals.

Some analysts said the renminbi’s weakness is also primarily a result of the dollar’s own depreciation.

ING said in a recent note, “The recent depreciation of the CNY [renminbi] against currencies other than the US dollar is not a deliberate move to devalue the yuan, but almost entirely a reflection of US dollar weakness and a focus on USD/CNY stability.”