Euro’s Surge Creates Headwinds for European Banks Amid Tariff Fears

Global trade tensions reshape Q2 investment landscape, impacting earnings.

Europe’s major financial institutions are sounding alarms over the euro’s escalating strength and its impact on earnings, attributing currency shifts and a “wait-and-see” attitude among clients to the volatile investment climate influenced by U.S. tariffs.

Banks Grapple with Currency Fluctuations

Deutsche Bank, Germany’s largest lender, reported a better-than-expected second quarter but highlighted the pervasive effect of the euro’s appreciation against the U.S. dollar. Chief Financial Officer James von Moltke told CNBC that currency fluctuations were a significant factor influencing the bank’s financial results, which showed mixed performance in its core investment banking operations.

BNP Paribas Navigates Challenging Markets

Similarly, BNP Paribas, continental Europe’s largest bank by assets, experienced a substantial 26.8% year-on-year increase in its fixed income, currencies, and commodities division. However, CFO Lars Machenil acknowledged a tougher market compared to the previous year, citing tariff announcements, geopolitical uncertainties, and the dollar’s depreciation against the euro. He noted that euro strength “impacted” income generated outside Europe.

“The euro strength meant that all the income generated outside of Europe was a bit impacted by that.”

—Lars Machenil, CFO of BNP Paribas

The euro has gained 13.46% against the U.S. dollar year-to-date, a trend bolstered by the U.S. Federal Reserve’s decision to hold interest rates in June and the European Central Bank’s move to maintain its unchanged monetary policy. This currency movement can negatively affect European banks with substantial U.S. operations, as dollar earnings are converted into a stronger euro.

Tariff Uncertainty Drives “Wait-and-See” Approach

The ongoing trade dispute between the European Union and the U.S., with Washington’s August 1 deadline for a trade deal before potential 30% levies on EU exports, is significantly altering the market and investment outlook. BNP Paribas‘ Machenil indicated that this uncertainty has led to a cautious “wait-and-see” approach from clients. This sentiment contributed to the stable performance of the bank’s global banking unit, which handles mergers, acquisitions, and capital markets.

While clients are not entirely withdrawing from financing, discussions and deal pipelines remain active. “It’s a bit wait and see, waiting to see where the opportunities are,” Machenil explained. The impact of U.S. tariffs could result in “relatively steep” currency conversion costs and pose a “headwind” for European exporters, with the exact effect varying significantly across different corporate sectors, according to Deutsche Bank‘s Von Moltke.

UniCredit Reports Profit Growth Amid Volatility

UniCredit, Italy’s second-largest lender, reported a 25% year-on-year increase in second-quarter net profit. The bank pointed to “macro volatility and U.S. tariff concerns” as factors that temporarily shifted market activity towards trading in the second quarter. As European banks like Barclays and UBS prepare to release their earnings, the influence of global economic pressures on financial performance remains a key focus.

Globally, major U.S. banks have benefited from their trading dominance and policies that have stirred markets for bonds, currencies, equities, and commodities. For example, in the first quarter of 2023, U.S. bank profits rose by 20% compared to the previous year, partly driven by strong trading revenues, according to the Federal Reserve (Federal Reserve, Q1 2023 Bank Earnings Report).