Euro hits highest level in more than two years

Euro hits highest level in more than two years amid escalating trade war, declining confidence in dollar and Treasuries

Written by Samer Hasn, Senior Market Analyst at XS.com

The euro continued its rise against the US dollar today, reaching its highest level since February 2022, surpassing 1.1473 at the peak of the rally.

The euro’s gains come amid uncertainty surrounding the US economy, with the rapidly escalating trade war with China and Trump’s continued hesitation in making trade policy decisions. This is in addition to the diminishing safe-haven status of US Treasuries, leading to further dollar weakness.

Today, we witnessed a new chapter in the trade war between the United States and China, with the latter responding by raising tariffs on US imports to 125%, following Donald Trump’s raising tariffs on China to 145%.  Previous reports warned that escalating retaliatory measures would make ending the trade war and reaching a settlement more difficult.

These escalating prospects for the trade war maintain concerns about the trajectory of the US economy amid growing expectations of a economic contraction.

Furthermore, the uncertainty caused by the trade war is driving selloffs in US Treasury bonds and significantly raising yields. However, this time, the rise in Treasury yields has not erased the gains made by the euro against the dollar, but rather the opposite, due to declining confidence in these theoretically zero-risk assets.

Economist Mohammed El Erian, speaking to the BBC, believes that tariffs, inflation, and budget issues are diminishing the safe-haven status of Treasury bonds. The Wall Street Journal Editorial Board also stated in an opinion piece that the rising borrowing cost resulting from Trump’s “reckless” trade policies threaten to surprise markets for companies sensitive to bond and currency market movements.

This declining confidence in US government debt instruments reduces the impact of carry trade resulting from the widening yield gap between Treasury bonds and their eurozone counterparts. Even as the yield gap between 10-year US Treasury notes and their counterparts on German bunds reached its highest level since last February, at more than 1.86%, the euro managed to record gains today.

Zaid Barem / ymm