Key Points
- The scale of U.S. dollar declines and euro gains amid tariff-induced market chaos has caught some market players off-guard.
- With investors broadly exiting U.S. assets, questions remain over whether a pull-back lies ahead.
- The euro has benefited from an alternative safe haven status, buoyed by longer-term expectations of German fiscal spending and the euro area’s current account surplus.
Amid the madness of financial markets over the last two weeks, one particular move has caught many investors off guard — the sharp fall of the U.S. dollar and gains for the euro. The U.S. dollar index has plunged to a three-year low since U.S. President Donald Trump triggered the volatlity with his sweeping new tariff policy on April 2, falling another 0.65% earlier on Monday. Meanwhile, the euro was choppy on Monday, paring gains against the greenback to fall 0.3% in the afternoon. While U.S. stocks saw extreme moves in both directions as traders reacted to a fast-moving news flow, the dollar was on a downward path through all last week, despite conventionally being a so-called “safe haven asset” during volatile periods. Traditional wisdom would also dictate that the dollar would gain if tariffs push the U.S. Federal Reserve to act with more caution in cutting interest rates this year , fearing a resurgence in inflation . The euro has jumped from around $1.079 at the start of the month to $1.138, at times popping above the $1.14 level for the first time since February 2022. That has again come in spite of firmer expectations for the European Central Bank to rate cuts this year, amid concerns over slower economic growth in the euro area. Read more Trump exempts phones, computers, chips from new tariffs Trump, top aides fuel tariff confusion by questioning reciprocal exemptions China strikes back with 125% tariffs on U.S. goods as trade war intensifies Trump temporarily drops tariffs to 10% for most countries The scale of the dollar’s decline — along with a sell-off in U.S. Treasurys — has “wrong footed investors,” James Lord, global head of foreign exchange and emerging market strategy at Morgan Stanley, told CNBC’s “Squawk Box Europe” on Monday. “At the beginning of the year, being bullish on the dollar was one of the more popular and consensus trades. That hasn’t worked out very well,” Lord said. “I think what’s happening now is reflecting a loss of confidence in the outlook for the U.S. economy, reflecting a huge amount of uncertainty about the outlook for U.S. policy. After a decade of significant inflows into U.S. capital markets, people are looking elsewhere.” Minneapolis Federal Reserve President Neel Kashkari last week echoed that sentiment , telling CNBC there was “credibility to the story of investor preferences shifting” away from the U.S. EUR= 1M line Euro/U.S. dollar exchange rate. Morgan Stanley’s Lord added that it was unusual that the dollar had largely lost its correlation to moves in U.S. rates, but that a similar trend had temporarily been seen during the Covid-19 pandemic and the Financial Crisis. “The dollar reverted back to being a safe haven quickly afterwards, the question is whether or not this will also prove to be a temporary period,” he said. Euro strength Jane Foley, head of FX strategy at Rabobank London, said she had initially been surprised at both the weakness of the dollar and strength of the euro. “However, the story of a rapid re-allocation out of U.S. assets gathered traction last week and propelled the euro further,” she told CNBC, with another tailwind provided by the recent loosening of German fiscal rules to allow for greater spending in the coming years. .DXY YTD mountain U.S. dollar index. “The euro zone has a current account surplus and money tends to come home in a crisis, which is the basis of the safe haven qualities of both of the [Swiss franc] and the [Japanese yen],” she said. Foley noted that a currency such as the British pound — which has risen from $1.29 to $1.319 this month —would not benefit from repatriation in the same way as the euro because of the U.K.’s current account deficit. However, she added that the severity of the moves in the euro and dollar raised the likelihood of pullbacks, especially on profit-taking. “What will be interesting will be the depth of these pullbacks and whether or not buyers for the euro are still keen at these levels,” she said. Morgan Stanley’s Lord said he saw a lot more room for rate differentials to push the euro-dollar up in the near term, though this will be driven by the Federal Reserve’s side, since markets are already pricing in a dovish ECB. “Even though the Fed doesn’t look likely to be be cutting rates anytime soon, we do think that over the course of the next 12 to 18 months, the Fed could be cutting down to sort of two and a half percent,” he said, a move that would take its funds rate down by a percentage point. “That’s a long way from being priced, and this should be something that can help put the dollar under a bit more downward pressure.”