Michael Savage, a senior dealer with Bank of Ireland’s Corporate & Commercial Banking division, analyses the ongoing volatility and geopolitical risks affecting currencies today.
“To make €1 in revenue, for example, an Irish exporter to the US would have needed to sell their product for about $1.03 at the turn of the year. Now, they need to sell that same product for $1.14, and that’s before accounting for any tariff increase”
At the start of 2025, EUR/USD was trading below $1.03. The consensus trade was long USD, with a move below parity widely expected, underpinned by the narrative of US exceptionalism, a strong labour market, and a pro-growth US administration.
That consensus has been upended. Over the past 4 months, the Euro has risen to $1.14, and many FX analysts — as well as Bank of Ireland’s economics team — see EUR/USD trading at $1.20 by the end of the year.
A double whammy for the Dollar
Dollar sentiment has reversed course in a dramatic fashion through the year. At the year’s outset, markets widely believed that the United States—buoyed by President Trump’s promised tax cuts and deregulation—would outpace its G10 peers. Tariff threats were seen as background noise, unlikely to derail the broader pro-growth agenda.
What has changed since? In short, a lot. On the surface level, two main events provided the catalyst for the change in sentiment around EUR/USD. The first came in early March, when the German Government, long a symbol of fiscal conservatism, announced its most aggressive fiscal stimulus since reunification. The German government’s suspension of the debt brake and stimulus plans exceeding €100bn sent a clear signal: the Eurozone’s largest economy is now willing to lead on demand-side policy.
By breaking away from the traditionally conservative fiscal stance, Germany created a path for Euro strength that has a credible domestic growth anchor, not just a weak-Dollar tailwind. At the time, the positive German fiscal shock stood a good chance of being the story of the year, with markets taking EURUSD out of its early year range of $1.02 to $1.05, finding a new range of $1.075 to $1.106 for the month of March.
The second catalyst, of course, was the April 2nd “Liberation Day” tariff announcement. The tariff announcements from the Trump administration far exceeded market expectations, with protectionist rhetoric turning into real policy at a pace that surprised the majority of investors.
Investor reaction to the tariff announcements was something of a tipping point after growing concerns about the coherence, or otherwise, of the US administration’s trade and foreign policy. Rhetoric about annexing Greenland, integrating Canada as a 51st state, and threatening key allies with financial sanctions deeply unsettled international confidence in US policymaking.
The FX market reacted strongly. April 2nd was a “risk-off” event, but where investors typically view USD as the primary safe haven currency in “risk-off” events, this time investors sought to reduce USD exposure. The Euro, the Swiss Franc and the Yen all benefited, with EURUSD finding a new range between $1.108 and just above $1.15.
While Trump’s tariff-related headlines wreaked havoc in markets in early April, markets more recently are reacting less and less to Trump’s meandering decision-making process and are focusing more on the longer term impact of a global economy with higher trade barriers and potential underlying structural issues in the US that may lead to further Dollar weakness.
Structural issues underlying the USD sell-off
In a few short months, 2025 has delivered some serious catalysts to push the Dollar over, but it’s important to bear in mind that vulnerabilities had been building in the background even as the Dollar moved ever higher prior to March this year. Most notable is investor concerns regarding the sustainability of US debt levels, and a widening in the current account deficit that is now above 4% of GDP.
Adding to these concerns, Trump’s “big, beautiful bill” tax bill, which is making its way through the US legislative process at present, front loads tax cuts and leaves the majority of offsetting spending cuts to the next administration. Investors are concerned, and the recent downgrade of US debt by Moody’s Ratings Agency, who expect that the federal debt burden to rise to 134% of GDP by 2035, adds further headwinds to the Dollar.
While flows away from US assets appear to been limited at present, even a marginal change in investor appetite for US assets could be significant. The IMF estimates that non-US investors now hold $22tn in US assets. Should these investors prefer to reduce their US exposure, it would almost certainly result in significant Dollar depreciation.
FX markets remain volatile and uncertain
Of course, market sentiment can change on a whim, and there are risks to the downside for EUR/USD. If the US labour market proves more resilient than expected and domestic demand holds up, the case for expected Fed easing could weaken. A still-robust US economy with higher interest rates could reassert the Dollar’s attractiveness relative to slower-growth peers.
Similarly, geopolitical risks that have been so prevalent over the past years remain relevant to investor appetite for safe haven currencies. Any escalation in Russian or Middle Eastern conflicts may not bode well for currencies geographically close, such as the Euro or the Swiss Franc. Appetite for the Dollar may increase again in such a scenario.
Importers and Exporters exposed to FX risk
Much of the discussion this year has been about how US tariffs, and indeed retaliatory EU tariffs, are a significant risk to Irish companies who trade with the US. While this is undoubtably true, the related FX risks are equally significant.
To make €1 in revenue, for example, an Irish exporter to the US would have needed to sell their product for about $1.03 at the turn of the year. Now, they need to sell that same product for $1.14, and that’s before accounting for any tariff increase.
Importers from the US face similar risks. The future path of EUR/USD can have significant impact on profitability, regardless of how the tariff regime plays out.
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