US tariff escalation threatens dollar stability: EUR/USD outlook
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As the U.S. prepares to impose unprecedented tariffs, concerns are growing over the economic fallout, particularly for the dollar. The risk of recession, rising trade tensions, and the potential divestment of Treasuries by foreign allies are fueling volatility across FX markets. In this environment, the EUR/USD pair presents a key opportunity for traders, provided they approach the situation with a disciplined strategy grounded in macro fundamentals.
The prospect of sweeping tariffs, set to be unveiled on April 2—coined “Liberation Day” by President Trump—raises the stakes for the U.S. economy. Market participants are grappling with heightened uncertainty, and the implications could be severe. According to the IMF, extended policy ambiguity tends to undermine economic output. Goldman Sachs recently raised its estimate for a U.S. recession within the next 12 months from 20% to 35%, echoing similar assessments by JP Morgan and Moody’s Analytics, which project a 40% probability of contraction.
Average U.S. tariff rates, currently at 2.2%, could surge to levels unseen in modern trade history. Trump’s dual objective—to replenish the U.S. budget via higher duties and pressure trading partners into reciprocal reductions—may prove contradictory. Even if higher tariffs generate short-term revenue, their longer-term fiscal benefit is dubious, especially if they are later scaled back or circumvented by retaliatory actions.
A key vulnerability lies in foreign holdings of U.S. Treasuries. Over the past decade, international ownership of Treasuries has climbed from $6.1 trillion to $8.5 trillion, accounting for roughly 30% of total issuance. Japan ($1.06 trillion), China ($759 billion), Luxembourg ($424 billion), and Canada ($379 billion) remain the largest holders. Should these nations reduce or halt their purchases in response to aggressive U.S. trade policy, Treasury yields could spike, tightening financial conditions and deepening downside risks for the dollar.
Meanwhile, Goldman Sachs forecasts not just one, but three rate cuts by the Federal Reserve in 2025, reinforcing the case for a weaker greenback. Conversely, Wells Fargo anticipates a temporary dip followed by a potential 1.5–11% rebound in the U.S. dollar index, depending on the scope of foreign retaliation.
In the immediate term, volatility in EUR/USD is likely to surge around the April 2 announcement. The pair’s reaction will hinge on whether tariffs are broad-based or selectively applied, and whether they include exemptions for key allies. Traders should prepare for sharp directional moves. A sustained break above 1.0845 could open the door for long positions, with the potential for further upside if the dollar weakens under recession fears or rate cut expectations. Conversely, a drop below 1.078 could trigger fresh selling, offering opportunities for short positions in alignment with renewed dollar strength.
Fundamentally, the EUR/USD outlook hinges on the intersection of monetary policy divergence, global capital flows, and geopolitical alignment. Traders are advised to monitor Treasury yields, Fed communication, and EU economic indicators closely. In a world increasingly shaped by economic nationalism, the dollar’s dominance is no longer a given—and the euro may be poised to reclaim ground under the right macro conditions.
The prospect of sweeping tariffs, set to be unveiled on April 2—coined “Liberation Day” by President Trump—raises the stakes for the U.S. economy. Market participants are grappling with heightened uncertainty, and the implications could be severe. According to the IMF, extended policy ambiguity tends to undermine economic output. Goldman Sachs recently raised its estimate for a U.S. recession within the next 12 months from 20% to 35%, echoing similar assessments by JP Morgan and Moody’s Analytics, which project a 40% probability of contraction.
Average U.S. tariff rates, currently at 2.2%, could surge to levels unseen in modern trade history. Trump’s dual objective—to replenish the U.S. budget via higher duties and pressure trading partners into reciprocal reductions—may prove contradictory. Even if higher tariffs generate short-term revenue, their longer-term fiscal benefit is dubious, especially if they are later scaled back or circumvented by retaliatory actions.
A key vulnerability lies in foreign holdings of U.S. Treasuries. Over the past decade, international ownership of Treasuries has climbed from $6.1 trillion to $8.5 trillion, accounting for roughly 30% of total issuance. Japan ($1.06 trillion), China ($759 billion), Luxembourg ($424 billion), and Canada ($379 billion) remain the largest holders. Should these nations reduce or halt their purchases in response to aggressive U.S. trade policy, Treasury yields could spike, tightening financial conditions and deepening downside risks for the dollar.
Meanwhile, Goldman Sachs forecasts not just one, but three rate cuts by the Federal Reserve in 2025, reinforcing the case for a weaker greenback. Conversely, Wells Fargo anticipates a temporary dip followed by a potential 1.5–11% rebound in the U.S. dollar index, depending on the scope of foreign retaliation.
In the immediate term, volatility in EUR/USD is likely to surge around the April 2 announcement. The pair’s reaction will hinge on whether tariffs are broad-based or selectively applied, and whether they include exemptions for key allies. Traders should prepare for sharp directional moves. A sustained break above 1.0845 could open the door for long positions, with the potential for further upside if the dollar weakens under recession fears or rate cut expectations. Conversely, a drop below 1.078 could trigger fresh selling, offering opportunities for short positions in alignment with renewed dollar strength.
Fundamentally, the EUR/USD outlook hinges on the intersection of monetary policy divergence, global capital flows, and geopolitical alignment. Traders are advised to monitor Treasury yields, Fed communication, and EU economic indicators closely. In a world increasingly shaped by economic nationalism, the dollar’s dominance is no longer a given—and the euro may be poised to reclaim ground under the right macro conditions.