The euro weakened, falling below $1.085 after previously reaching a near five-month high. Concerns over potential US tariffs and the European Central Bank’s (ECB) dovish stance on inflation, in contrast to the US Federal Reserve’s position, contributed to the currency’s decline. Expectations for ECB interest rate cuts have also been tempered recently.
- The euro fell below $1.085 after hitting a near five-month high of $1.09547 on March 18th.
- ECB President Lagarde warned that a 25% US tariff on European imports could reduce euro area growth by 0.3 pp in the first year, and a counter-tariff could deepen the impact to 0.5 pp.
- Lagarde indicated that inflationary pressures from tariffs would fade over time, suggesting the ECB would not respond with higher rates.
- ECB’s de Galhau stated the ECB has room to further lower borrowing costs as inflation is less of a concern in the eurozone compared to the U.S.
- Traders have reduced expectations for ECB cuts, now anticipating only two reductions this year.
- The US Federal Reserve held rates steady and reaffirmed plans for two cuts this year.
The euro’s movement suggests sensitivity to both geopolitical risks and central bank policies. Concerns regarding tariffs, especially the potential negative impact on economic growth, put downward pressure on the currency. Furthermore, the ECB’s apparent willingness to maintain a more accommodative monetary policy compared to the Federal Reserve contributes to the currency’s weaker position, as it suggests a less attractive return for investors holding euro-denominated assets. This creates a dynamic where any potential economic headwinds for the Eurozone, or perceived divergence in monetary policy, may lead to further downward pressure on the currency.