Euro May Hold Firm Despite Trump’s New Trade Threats
Renewed trade threats from Washington may sound hostile for Europe, but the currency market reaction could be far more muted than the political rhetoric suggests.
Despite President Donald Trump escalating trade pressure tied to Greenland, the euro may avoid sustained damage. The reason, according to currency strategists, has less to do with trade balances and far more to do with capital flows.
Key Takeaways
- Trade threats from the US may have only a limited and short-lived impact on the euro.
- Europe’s role as the largest foreign holder of US assets gives it significant financial leverage.
- Capital flows, not tariffs, are seen as the real risk if tensions escalate.
Europe is not just a trading partner of the United States – it is its largest financier. European investors collectively hold roughly $8 trillion in US stocks and bonds, making the region the single biggest source of foreign capital for American markets.
That reality, argues George Saravelos of Deutsche Bank, fundamentally changes the power dynamic.
Capital leverage outweighs tariffs
Saravelos warns that markets may be focusing on the wrong battlefield. While tariffs dominate headlines, the more disruptive risk lies in financial interdependence. With the US net international investment position deeply negative, even small shifts in foreign capital allocation could have far greater consequences than changes in trade policy.
In this environment, aggressive trade tactics risk accelerating a gradual rebalancing away from US assets. Such a move would pressure the dollar and reshape global portfolios far more violently than any import tax.
Europe’s political response could support the euro
Paradoxically, external pressure from Washington may strengthen Europe internally. Saravelos suggests that trade threats could push EU governments toward greater unity, reducing fragmentation risks that typically weigh on the euro.
Investors are now watching closely to see whether the European Union activates its anti-coercion instrument, a legal framework designed to respond to economic pressure from third countries. French President Emmanuel Macron is expected to push for its use, according to people familiar with the discussions.
Such a move would signal that Europe is prepared to defend itself not only through trade retaliation, but through broader economic coordination.
The real risk scenario
For now, Saravelos believes any euro weakness sparked by tariff headlines is likely to fade quickly. The genuine threat to markets would only emerge if tensions spill from trade into finance – for example, if capital flows become politicized.
In that case, the shock would not come from goods crossing borders, but from money changing direction. And given Europe’s outsized role in funding the US economy, that shift would be far more destabilizing than any tariff announcement.
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