Euro slips as Lagarde warns of growth risks from US tariffs

The euro fell below $1.085, retreating from a near five-month high of $1.09547 touched on March 18th, as concerns over economic growth in the euro area weighed on sentiment. The retreat came after European Central Bank (ECB) President Christine Lagarde warned of weaker growth but downplayed the risk of inflation if the EU retaliates against newly announced U.S. tariffs.

Euro slips as Lagarde warns of growth risks from US tariffs

Speaking to European lawmakers on Thursday, Lagarde highlighted that a 25% U.S. tariff on European imports could reduce euro area growth by 0.3 percentage points in the first year, with a counter-tariff potentially deepening the economic hit to 0.5 percentage points. The most pronounced impact would occur in the initial year, with lingering effects on output, though inflationary pressures were expected to fade over time. This signaled that the ECB would not react with higher interest rates in response to trade tensions, further cementing expectations of eventual monetary easing.

Other speakers influenced the currency

Additionally, ECB policymaker François Villeroy de Galhau emphasized that the central bank has room to cut borrowing costs, as inflation remains less of a concern in the eurozone compared to the U.S. His remarks reinforced the growing belief that the ECB is moving closer to reducing interest rates, especially as growth risks continue to mount. However, traders have recently scaled back expectations for the number of rate cuts, now pricing in just two reductions this year, down from earlier expectations of three or more.

Fed influence on the US dollar

Meanwhile, across the Atlantic, the U.S. Federal Reserve left interest rates unchanged but reaffirmed plans for two rate cuts in 2024. With the Fed and ECB both signaling easing ahead, the euro’s trajectory will depend on the relative timing and scale of rate reductions. Any signs of further economic deterioration in the eurozone or escalating trade tensions could add to downside pressure on the common currency. Conversely, if the Fed moves ahead with rate cuts before the ECB, the dollar could weaken, providing some support for the euro in the coming months.