April 7, 2025 – Written by Tim Boyer
STORY LINK Euro to Dollar Forecast: EUR Awaits EU Tariff Retaliation, USD to Weaken
The Euro to Dollar exchange rate (EUR/USD) was subject to extreme volatility after President Trump imposed widespread tariffs on global economies.
As fear stalks major markets, the European reaction will be a crucial test for market sentiment
After a surge to 6-month highs near 1.1150, there was a slide to below 1.0950 as equity markets came under heavy pressure and Fed Chair Powell ruled out an emergency interest rate cut.
There are likely to be big changes in investment bank forecasts over the next few weeks.
According to BNP Paribas; “Our base case is for moderate EURUSD gains in 2025 (to 1.12) and substantial gains in 2026 (to 1.20), as the Fed starts cutting rates in 2026.”
On a near-term view it also now forecasts that EUR/USD will strengthen to 1.14.
In contrast, HSBC expects that the dollar will regain ground.
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Risk conditions deteriorated rapidly and heavily as fears over the global economy intensified and Fed Chair Powell ruled out any emergency rate cut.
There were sharp gains in defensive assets, notably the Swiss franc with the dollar initially under heavy pressure before recovering ground as China announced retaliation.
According to ING; “Remember that if investors don’t like the dollar – and the US is the epicentre of the story – then the next most liquid G10 currency is the euro.”
The US Administration announced a baseline 10% tariff on all imports into the US which came into effect on April 5th.
Many major countries, however, were given additional tariffs. Although labelled as reciprocal, the extra levies simply punished countries running trade surpluses with the US and were, therefore, also a designed as a political weapon.
The overall EU tariff was set at 20%, Japan at 24% and China at 34%. These are scheduled to come into effect on April 9th.
China announced retaliation on Friday with 34% tariffs on US exports.
Over the medium term, the relative economic impacts will be very important for markets and FX rates.
In this context, potential retaliation by the EU, diplomatic negotiations and the next US Administration moves will be crucial.
The EU Commission is planning to announce counter-tariffs this week, potentially on certain categories rather than universal tariffs.
A measured EU stance could underpin risk appetite.
MUFG also commented; “Hopefully, the deepening financial market sell-off will put pressure on President Trump and other countries to quickly reach deals to water down the proposed tariff hikes and provide some relief for financial markets.”
Investors will still be braced for a long-term impact.
According to HSBC; “Markets need to digest a global economic slowdown, not just a US one. When this reality sinks in, the US will likely regain its relative allure in this potential race to the bottom for economic activity.”
Monetary policy will also be a key element. There are now strong expectations that the ECB will cut rates this week with two further reductions over the remainder of the year.
Federal Reserve Chair Powell stated that it was too early to judge the economic impact of tariffs and stated that the committee would take its time in deciding on any policy changes.
Markets are, however, convinced that the Fed will cut rates by mid-year.
Deutsche Bank considers the risk of a slide in dollar confidence; “The safe haven properties of the dollar are being eroded.”
It added; “Our overall message is that there is a risk that major shift in capital flow allocations take over from currency fundamentals and that FX moves become disorderly.”
The bank also warned over implications for other countries; “The last thing the ECB wants is an externally imposed disinflationary shock from a loss in dollar confidence and a sharp appreciation in the euro on top of tariffs. Expect pushback. We are in the midst of dramatic regime change in markets.”
MUFG noted some hopes for the Euro; “Plans for significantly looser fiscal policy in Germany and reports of EU-wide support measures for growth to offset the negative impact from tariffs are helping to provide support for the EUR at the time when US tariffs will significantly tighten fiscal policy in the US.”
UBS expects the dollar will lose further ground; “First, the US is the focal point and will therefore likely bear the brunt of the economic fallout caused by waging a trade war on multiple fronts. This means US growth faces greater downside risks, implying lower US interest rates and a more dovish Federal Reserve; all of this weighs on the greenback.”
It did, however, note that; “while the focus has been mainly on the US economy over the past two days, the rest of the world will also suffer from increasing trade burdens.”
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TAGS: Euro Dollar Forecasts
