This morning there was a very different tone to the conversation about the U.S. Dollar. It was on the back of a speech by Jerome Powell from yesterday where he stressed that the Fed must ensure tariffs don’t trigger more inflation. The European Union has not made much progress in negotiating tariffs with the U.S. In the meantime the ECB is doing better with its inflationary challenges.
The U.S. dollar is losing its safe haven status due to the impact of Trump’s ‘Liberation Day’ tariffs. The best way to explain this is through the relationship between the dollar and Treasury yields. Bloomberg has reported how last week was only the third time in more than 50 years that the dollar declined more than 2.5 percent while the 10-year Treasury yield rose by at least 25 basis points. In the past these situations have been followed by sustained dollar weakness.
Is the Euro a Safe Haven?
With the dollar’s future in question, some market participants have suggested that the Euro may be a truer safe haven for investors. The euro has surged over 10% against the U.S. dollar since January and is holding on 1.13 against the dollar today. Add to this the performance of European equities and one can see that investors may be turning to the Euro and away from the dollar.
Ivo Mertens, Chief Economist, iBanFirst shared with Disruptionbanking how “the single currency is seeing its biggest rise in 15 years. Hedge funds are buying up euros instead of dollars, and investors are taking long positions in the options market, targeting an EUR/USD rate of 1.20.
“Once considered a risky asset, the euro is now attracting safe-haven capital flows, alongside German Bunds. The EU might welcome this, but the strength of the euro is a real economic headache.”
It wasn’t long ago when we were reading about Euro dollar parity. Today this topic is no longer valid. This has resulted in inflation, even with tariffs, being a bigger problem for the U.S. rather than the European Union.
What did the ECB Announce Today?
Today the European Central Bank has cut the benchmark rate by a quarter point to 2.25%. This is the seventh time in a year that the ECB has cut interest rates.
The bank stated how “the disinflation process is well on track. Inflation has continued to develop as staff expected, with both headline and core inflation declining in March.” The bank believes that the target inflation rate of 2% is now a medium-term target, not a long-term one.
Author: Andy Samu
See Also:
Will Trump’s Liberation Day Cause a Stock Market Crash? | Disruption Banking
How Private Equity Is Driving Europe’s Economic Recovery | Disruption Banking
Is The Swiss Franc a Safe Haven in 2025? | Disruption Banking
