The US dollar continues to decline sharply against other major currencies, following a trend that saw its largest annual depreciation in nearly a decade in 2025.
This past Tuesday, the dollar dropped 1.3% against a collection of currencies, marking a total decline of 2.6% since the start of 2026. In 2025, it saw a 9.5% decrease.
This decline has a ripple effect on the euro and other currencies. The euro has recently climbed to the $1.20 mark for the first time since 2021, with the British pound and Japanese yen also hitting recent highs against the dollar.
Many economists attribute the dollar’s ongoing fall to a growing distrust among investors regarding the US currency, which is fueled by President Donald Trump’s unpredictable policy moves.
Some analysts suggest that Trump and members of his economic team might actually seek a weaker dollar to enhance US exports and manufacturing, in line with a longstanding strategy.
Trump himself has not shown much concern about this issue. When asked if he was worried about the falling value of the dollar, he replied, “No, I think that’s great.”
Stephen Millan, who was once the chairman of Trump’s Council of Economic Advisers and is now part of the US Federal Reserve Board of Governors, released a guide in November 2024 that discusses potential strategies for reshaping the global trading system, emphasizing tariffs and dollar devaluation as key tools.
Should Europe be concerned?
While the weakening dollar impacts the US economy, it also has repercussions for the eurozone, where the euro has strengthened by 13% against the dollar in 2025, marking its best performance since 2017.
Jack Allen-Reynolds, a deputy chief eurozone economist at Capital Economics, notes that a strong euro can negatively impact local manufacturers by making exports less competitive, even as imports become cheaper for consumers.
He stated, “A strong euro affects the economy’s performance, labor market health, and household financial stability.”
Ricardo Amaro, the chief eurozone economist at Oxford Economics, warned that if the euro continues to rise against the dollar, European exporters targeting the US market might struggle. Although he believes that lower costs for American products could provide some relief, prolonged unfavorable exchange rates could hinder European growth.
According to his economic model, if the euro-dollar exchange rate remains stable, eurozone GDP could be approximately 0.2% lower by the year’s end than previously anticipated.
Challenges for exporters
However, Zsolt Darvas, an expert on macroeconomics at the Bruegel think tank, pointed out that European exports have managed to hold up even when the euro was valued more highly than it currently is.
The current rate of $1.20 is still below the levels seen in 2021 and far lower than the $1.30 to $1.50 range typical from 2004 to 2014. “The recent slight depreciation of the dollar is not expected to cause major problems for Europe,” Darvas mentioned, suggesting that media attention on the dollar’s decline might actually shift investor focus toward the EU.
Nevertheless, he cautioned that there’s a risk the exchange rate could drop further, especially following the upheaval caused by Trump’s trade tariffs last year.
According to Goldman Sachs, companies in the STOXX Europe 600 index obtain around 30% of their revenue from the United States. A stronger euro tends to correlate with positive growth forecasts, but some European sectors may face increased vulnerabilities from a weaker dollar.
Amaro also suggested that the U.S.’s reliance on European medicines might mitigate some adverse effects, yet he highlighted the pharmaceutical and automotive industries as particularly at risk.
Allen-Reynolds noted that euro area exports have generally weakened due to rising competition, especially from China, asserting that while current developments might not severely impact export demand, they certainly don’t help.
Will the ECB step in?
The euro’s rising value has led to speculation regarding potential intervention from the European Central Bank (ECB).
Austrian central bank president Martin Kocher stated that while the recent euro appreciation has been “moderate,” the ECB may need to take action if the exchange rate starts to negatively influence inflation expectations.
Most analysts feel now isn’t the right time for major policy interventions, though they recognize that further gains in the euro’s value could compel ECB policymakers to respond if inflation levels are threatened.
Amaro has indicated that ECB officials are “monitoring the situation and expressing some concerns” in hopes of influencing market expectations. This situation could bring the discussion of interest rate cuts back into play.
Allen-Reynolds sees no immediate need for action regarding exchange rate shifts observed in January, but he does believe significant changes could lead the ECB to cut rates later this year.
Meanwhile, Darvas argues that current inflationary effects are minimal, with no sectors particularly exposed to vulnerability. “Businesses have adapted to much larger exchange rate fluctuations over the decades,” he concluded.
