Euro versus dollar

The weakening dollar

The current weakness of the US dollar has been the subject of intense debate since the world’s reserve currency began its sharp descent back in March. While 1.02 dollars were enough to buy one euro at the beginning of February, it now takes almost 1.14 dollars. The ICE U.S. Dollar Index, a leading benchmark for the value of the dollar within a basket of six other currencies, had fallen by eight per cent by mid-April, the sharpest decline since the index was introduced in 1973.[1] This is generally attributed to the unpredictability of Trump’s trade policies. Their impacts are difficult to foresee, which has shaken confidence that the dollar will remain a safe-haven currency. A weaker US dollar is favourable for US President Trump’s push for the United States to regain a stronger industrial base. After all, imports will become noticeably more expensive, giving US-based companies clear advantages over their competitors abroad. This weakening of the currency is compounded by the impact of the tariffs imposed by Trump. Aimed at protecting US industry from being undercut by imports, the tariffs are already making life difficult for the companies around the world who supply the US market.

Opportunities for the euro

The dollar’s weakness and its consequences were addressed last Monday by Christine Lagarde, President of the European Central Bank (ECB), in a speech at the Hertie School in Berlin. Lagarde placed currency problems in the broader context of current global political and economic developments. “Multilateral cooperation is being replaced by zero-sum thinking and bilateral power games,” Lagarde observed, so open markets were giving way to national protectionism. This posed major risks for the entire European Union, she said, since “our economy is deeply integrated into the global trading system, with exports accounting for close to one fifth of our value added” and supporting 30 million jobs.”[2] On the other hand, this trend also offered unexpected opportunities for the euro, she argued. There was currently “uncertainty” about “the dominant role of the US dollar,” explained the ECB President, which “could open the door for the euro to play a greater international role.” At present, only 20 per cent of all currency reserves worldwide are held in euros, compared with 58 per cent in US dollars. But a prolonged period of dollar weakness could, start shifting the balance significantly in favour of the European single currency.

Stronger foundations

In her speech, Lagarde pointed out that “increasing the international role of the euro can have positive implications for the euro area” by making it possible for governments and businesses to “borrow at lower cost, helping boost internal demand at a time when external demand is becoming less certain.”[3] In addition, a larger volume of trade could be conducted in euros, which would give the EU greater independence. All of this would also provide greater protection “from sanctions and other coercive measures,” a clear reference to new ways of warding off US attacks in the current context of a global economic war. Lagarde stressed that this would only happen if the euro was made more attractive to investors and governments by working on its fundamentals. A “solid and credible geopolitical foundation” and “a steadfast commitment to open trade” were indispensable, she said. Both had to be underpinned not only politically but also with strong military capabilities. What is more, she called for the EU to finally create the single capital market it has long been striving for. And finally, Lagarde wants to see a united Europe in a much stronger position to act effectively by extending the use of majority decision-making – another change that has been called for, so far in vain, for many years.

Faltering dominance

Berlin and Brussels have in the past already entertained hopes of strengthening the euro against the dollar and even replacing the latter as the world’s reserve currency. Back in September 2008, for example, the then Federal Finance Minister, Peer Steinbrück, responding to the chaos of the global financial crisis, thought that the United States was in the process of losing its “status as the superpower of the global financial system.”[4] And a short time before, an analysis by the SPD-affiliated Friedrich Ebert Foundation had claimed that “the long-standing confidence of foreign investors and central banks” in the US dollar was “slowly being exhausted” and that the dollar was in danger of “losing its function as the global reserve currency.”[5] It highlighted what it saw as a new situation: “unlike in previous periods of dollar weakness” there was now “an alternative currency”, the euro, which supposedly could easily replace it. As we know, this did not happen. Lagarde is now pointing out that the dollar is losing some of its dominance, down to a 58 per cent share of global currency reserves, not seen since 1994.[6] It is important to note that efforts have been made for years to switch to other currencies for international trade [7] and move increasingly away from the dollar when securing loans [8]. This trend will further undermine the dollar’s dominance.

‘European independence’

The quest for a stronger role for the euro in the context of a weakening of the dollar comes at a time when calls are growing louder in Berlin and Brussels for Europe to gain greater global power independently of the US. In the face of the Trump administration’s multiple attacks on the EU, German Chancellor Friedrich Merz declared immediately after his election victory that it must be “an absolute priority to strengthen Europe as quickly as possible” in an effort to achieve “independence” from the United States.[9] Last Thursday, European Commission President Ursula von der Leyen said in her speech on receiving the Charlemagne Prize at a ceremony in Aachen that, “It is time for Europe to rise up once again. To rally around the next great European project.”[10] The previous “international order has rapidly descended into international disorder,” from which “a new international order will emerge in this decade.” And “we must shape this new order. ... Our mission is European independence.” As von der Leyen emphasised, this project meant “the need to invest in our security.” Indeed, the EU was now providing 800 billion euros in military spending, she said. She wanted to see a quickly improving economic situation, claiming that, “Europe has all it takes to lead the global economy of tomorrow.”

[1] Chelsey Dulaney, Alistair MacDonald: What the Weak Dollar Means for the Global Economy. wsj.com 16.04.2025.

[2], [3] Earning influence: lessons from the history of international currencies. Speech by Christine Lagarde, President of the ECB, at an event on Europe’s role in a fragmented world organised by Jacques Delors Centre at Hertie School in Berlin, Germany. ecb.europa.eu 26.05.2025.

[4] Steinbrück wirft USA massives Versagen vor. spiegel.de 25.09.2008.

[5] See: Vom Dollar zum Euro.

[6] Earning influence: lessons from the history of international currencies. Speech by Christine Lagarde, President of the ECB, at an event on Europe’s role in a fragmented world organised by Jacques Delors Centre at Hertie School in Berlin, Germany. ecb.europa.eu 26.05.2025.

[7] See: Westwährungen unter Druck.

[8] BRICS Bank to finance its members’ projects in local currencies. tvbrics.com 10.10.2024.

[9] Berlin Direkt, 23.02.2025. See also: “Unabhängigkeit von den USA.”

[10] Speech by President von der Leyen on being awarded the International Charlemagne Prize of Aachen. ec.europa.eu 29.05.2025.