The US dollar has been on a steep slide in 2025, tumbling roughly 13% against the euro and over 8% against the Japanese yen since January. This dramatic weakening stems from a perfect storm of economic and policy shifts under Trump 2.0.
Yes, the dollar was overvalued after a decade-long rally, while stronger growth prospects in Europe and Japan also caused investors to pull capital back from the United States to their home markets.
But the real vulnerability in the greenback emerged when US President Donald Trump returned to office in January and two months later announced aggressive tariffs on US imports from dozens of trading partners, including a 10% baseline tariff on European Union goods, sending shockwaves through global markets.
Far from bolstering the dollar, these trade barriers — coupled with fears of retaliatory measures from key partners like Canada and China — fueled prolonged uncertainty, dampening investor appetite for US assets.
Ballooning US government debt — now at a staggering 124% of gross domestic product (GDP) — persistent fiscal deficits and a recent Moody’s downgrade of the US credit rating have also raised red flags, driving investors toward the euro, yen, and Swiss franc as well as gold, which hit an all-time high in April.
Euro strength, tariffs ‘painful’ for European exporters
European manufacturers are now scrambling to adjust to a much stronger euro. As well as tackling the new exchange rate regime, firms are also awaiting a deal to avoid much higher tariffs on EU exports to the US, both of which make their products less attractive to US consumers and businesses.
Economist Gian Maria Milesi-Ferretti, a senior fellow at the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy in Washington D.C., thinks the combination of euro strength and new tariffs will be “painful” for European exporters.
“Dollar prices are most likely going to have to rise and European products will lose some market share in the US,” Milesi-Ferretti told DW. “The pain threshold will not just depend on the exchange rate but also profit margins and whatever tariff rate Trump decides on [with the EU].”
As the July 9 deadline approaches to avoid Trump’s threatened tariffs of 50% on European imports, US and EU negotiators have made only limited progress. Most EU goods are currently subject to a 10% baseline tariff, with a 25% US levy on steel, aluminum and cars.
Brussels-based think tank Bruegel estimated recently that EU exports to the US could drop by up to 1.1% if no deal is reached next week. Other analysts believe that higher tariffs and a weaker dollar will be a double-whammy for US consumers and businesses as well.
“A lot of the EU’s imports to the US are not final goods,” Thorston Beck, director of the Florence School of Banking and Finance, told DW. “Machinery from Germany, for example, is used to produce other goods. But if those machines get more expensive, so will the goods they produce.”
Beck thinks this scenario would spike US inflation and lower growth, which would further depress the dollar.
EU pharmaceutical, auto sectors face the most pain
Last year, the EU exported nearly €532 billion ($625 billion) in goods to the US, a 5.5% rise on 2023, according to Eurostat, the EU’s statistics agency.
Pharmaceutical products made up the largest share, with more than a fifth of EU-made medicines moving across the Atlantic, followed by autos, industrial machinery and aviation.
EU countries export around 750,000 vehicles a year to the US, according to consulting firm AlixPartners. This accounts for 14% of the EU auto industry’s total volume output, and 24% in terms of value. For the likes of Volkswagen and Mercedes-Benz, tariffs and currency concerns are a major concern.
Airbus, meanwhile, sends around 12% of its planes to the US, according to data from aviation data and analytics firm Cirium. An Airbus A320neo, priced at around $110 million (€93.6 million), could rise in price by $10 million due to the euro’s appreciation, making it less competitive against Boeing’s 737 MAX.
Milesi-Ferretti noted another way that US multinationals will also be impacted by both the euro’s strength and Trump’s tariffs, as many firms have offshored production to, say, Ireland to pay lower taxes, adding that “some of these strategies are likely to unwind.”
Is the euro too strong?
As the US debt burden remains top of investors’ minds for the second half of the year, the euro is predicted to gain further. Bank of America forecasts the single currency will be worth $1.20 by the end of 2026, versus $1.1759 on Wednesday. Others are more bullish, with forecasts like CoinCodex projecting the euro could climb as high as $1.36 by year-end.
This would support European Central Bank chief Christine Lagarde’s vision for the euro to enhance its international role amid declining confidence in the dollar. However, other senior ECB officials are concerned that the single currency is becoming too strong.
ECB Vice President Luis de Guindos told Bloomberg on Tuesday that “we should try to avoid any sort of overshooting,” and that levels beyond $1.20 “would be much more complicated” for policymakers.
Tomasz Wieladek, chief European economist for fixed income at T Rowe Price, told the Financial Times this week that the euro’s rise had been “too fast for comfort,” adding that if the euro reaches $1.25 this year, the ECB could cut interest rates by half a percentage point.
How long will the dollar stay weak?
The dollar is predicted to weaken further as Trump attempts to pass the One Big Beautiful Bill, extending the Republican president’s 2017 tax cuts and adding new tax breaks. The legislation is expected to add $3.1–$3.8 trillion to the US deficit over a decade.
But a standoff in Congress this summer over the debt ceiling, reinstated at $36.1 trillion in January, could accelerate the dollar’s decline, further boosting other currencies like the euro and yen.
The dollar’s slump this year has also bolstered the narrative around the greenback’s status as the world’s reserve currency. More than half of global trade invoices are priced in dollars and nearly 90% of foreign exchange transactions are in dollars.
China and other BRICS nations seeking to reduce reliance on the dollar for trade, additional risks to the dollar’s strength have emerged. The BRICS bloc has considered launching a common currency, but has so far prioritized trade in local currencies, including China’s yuan-based oil trades with Russia.
Beck, who is also a financial stability professor at the Florence, Italy-based European University Institute, thinks the US dollar could remain weak beyond Trump’s second term but that the Chinese yuan would struggle to replace the US dollar because “it’s very difficult for them to create the same trust that the dollar has had for many decades.”
Showing himselfe convinced that there won’t be one alternative arising to replace the dollar, “at least not in the next 20 or 30 years,” Beck told DW that there will be “more of a fragmentation, with regional currencies like the euro and Swiss franc assuming roles that the dollar used to have.”
Edited by: Uwe Hessler
