Dollar Plummets Amid Trade Fears, Euro Surges

The U.S. dollar is experiencing a sharp decline in 2025, dropping around 13% against the euro and over 8% against the yen since January. This depreciation stems from economic and political shifts under the new **Trump** administration.

Dollar Under Pressure

While the dollar was previously overvalued, stronger growth prospects in Europe and Japan have lured investors away from the U.S. However, the currency’s vulnerability was exposed when **Donald Trump** announced aggressive tariffs, triggering turmoil in global markets.

Rather than strengthening the dollar, these trade barriers and the potential for retaliation from key partners like Canada and China fostered prolonged uncertainty. This uncertainty diminished investor interest in U.S. assets.

Adding to the pressure, American public debt has soared to 124% of GDP. Persistent fiscal deficits, along with a recent downgrade of the United States’ credit rating by Moody’s, have further alarmed investors, driving them toward safer havens such as the euro, yen, Swiss franc, and gold.

Euro Strength, Tariff Impacts

European manufacturers are adapting to a stronger euro, while they await potential agreements to avoid high tariffs. The combination of a strong euro and new tariffs could prove painful for European exporters.

“It is very likely that the dollar prices of European products in the United States have to go up and lose market share,” according to economist **Gian Maria Milesi-Ferretti**, a principal researcher at the Hutchins Center for Fiscal and Monetary Policy of Brookings Institution in Washington DC.

**Milesi-Ferretti** also noted: “The threshold from which this will be painful will not only depend on the exchange rate, but also on the benefit and tariff margins that **Trump** decides [con la UE]”

With a July 9th deadline approaching to avoid tariffs that **Trump** threatened to impose on European imports, progress between U.S. and EU negotiators remains limited. Currently, most EU products face a 10% base tariff, along with a 25% American tax on steel, aluminum, and cars.

“Many of EU imports to the US are not final goods,” explained **Dw Thorsston Beck**, director of the Florence Banking and Finance School. “German machinery, for example, is used to produce other goods. But if those machines are more expensive, the goods they produce will also do.” **Beck** believes this scenario would drive up American inflation and stifle growth, further weakening the dollar.

Sectors Facing Headwinds

EU exports to the U.S. totaled around 532 billion euros last year, with pharmaceuticals leading the way, followed by cars, industrial machinery, and aviation. According to the European Automobile Manufacturers Association, the U.S. is the largest export market for EU-made vehicles, accounting for 20% of total exports in 2024 (ACEA 2025).

The EU countries export approximately 750,000 vehicles annually to the U.S., according to Alixpartners. For companies like Volkswagen and Mercedes-Benz, tariffs and the dollar’s decline are causes for considerable concern.

Airbus sends about 12% of its airplanes to the U.S., according to Cirium. The rising euro could increase the price of an Airbus A320neo by $10 million, making it less competitive against Boeing’s 737 Max.

Dollar’s Future as Reserve Currency

The Fiscal Law promoted by **Donald Trump** in the United States could add between 3.1 and 3.8 billion dollars to the US fiscal deficit in a decade. The stagnation in the Congress on the debt roof, established in January in 36.1 billion dollars, does not help to avoid doubts about the dollar.

This drives the appeal of other currencies, like the euro and yen, and raises questions about the dollar’s role as the world’s reserve currency. However, the dollar remains dominant, used in over half of global commercial invoices and nearly 90% of foreign exchange transactions.

China and other BRICS nations are seeking to reduce their reliance on the dollar for trade, adding further risks for the American currency. **Beck** suggests the dollar could remain weak after **Trump’s** second term, but the Chinese Yuan faces challenges in replacing it due to confidence issues.

While a complete replacement for the dollar seems unlikely in the near future, **Beck** anticipates greater fragmentation, with regional currencies such as the euro and Swiss franc assuming some of the dollar’s traditional roles.