The euro has weakened against the dollar in recent weeks, reaching a five-month low, as investors seek safe haven assets amid escalating trade war fears. The potential for higher tariffs imposed by the United States on European goods has fueled uncertainty in the market, leading to a flight to the dollar.
The euro has fallen by 5% since Donald Trump's election victory in November, reflecting expectations of stronger US economic growth and higher interest rates. These expectations are driven by the potential impact of inflationary policies such as tariffs and tax cuts, which could prompt the Federal Reserve to raise interest rates.
A weaker euro could benefit European exporters, making their goods more competitive in global markets. However, it could also lead to higher import prices, potentially fueling inflation in the region.
The impact of a weaker euro on European businesses is mixed. While exporters may benefit from increased competitiveness, businesses with operations in Latin America could be negatively affected by the devaluation of currencies in that region. For example, BBVA in Mexico, which generates nearly half of its profits there, and Banco Santander, with operations in Brazil and other Latin American countries, could face challenges.
Companies with operations in the United States, on the other hand, could benefit from a stronger dollar. Their dollar-denominated earnings would be worth more when converted back to euros.