Euro emerges as new safe haven for cash as Trump tariffs unsettle currency market

As confidence in the US economy falls as a result of President Donald Trump’s policies, euro has emerged as a safe haven that has gained at the cost of US dollar.

Even though Trump came to office with the promise of bringing US economy out of the purported yearslong decline, the US dollar’s value has fallen 8 per cent since January and his botched rollout of tariffs has put the nation at the risk of recession.

Amid Trump’s erratic rollout of tariffs and uncertainty around economic and trade policies, traders and investors appear to be pivoting to the euro. Analysts have seen the pivot as a sign of loss of confidence in the US economy and US dollar.

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Euro climbs to 3-year high as US dollar falls

After falling 8 per cent since January, the US dollar is currently at a three-year low.

On the other hand, the euro just rose 4 per cent over two days and climbed to a three-year high. It reached the peak of $1.14 and hedge funds are hoping for it to reach $1.20 over the next three to four months, according to Bloomberg.

Three out of four options contracts bought on Friday were for more euro gains, according to the Depository Trust & Clearing Corporation (DTCC).

Separately, two Europe-based traders told Bloomberg that large volumes were going through on Friday that seek to benefit from further euro gains.

The foreign exchange market is going long on euros, but structural diversification flows will make this a theme many will jump on, Jordan Rochester of Mizuho International Plc told Bloomberg.

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“My upside risk of $1.15–$1.20 this year is quickly becoming a base case,” said Rochester, the head of macro strategy for Europe, the Middle East and Africa, at Mizuho.

This means that traders and investors are heavily buying and holding euros with the expectations that the currency’s value is going to increase. This is a sign of their confidence in euro. Such a behaviour is part of the trend where they are diversifying their investments and assets away from the US dollar and into other currencies, majorly euro.

Loss of confidence in US economy

The scale of US dollar’s decline indicates a loss of confidence in the US economy and the US currency, according to James Lord, the global head of foreign exchange and emerging market strategy at Morgan Stanley.

Lord told CNBC that bullish perception of the US dollar is fading and investors are looking elsewhere.

“At the beginning of the year, being bullish on the dollar was one of the more popular and consensus trades. That hasn’t worked out very well. I think what’s happening now is reflecting a loss of confidence in the outlook for the US economy, reflecting a huge amount of uncertainty about the outlook for US policy. After a decade of significant inflows into US capital markets, people are looking elsewhere,” said Lord.

Echoing Lord, Minneapolis Federal Reserve President Neel Kashkari told CNBC that there was “credibility to the story of investor preferences shifting” away from the United States.

Even as euro stands at the three-year high while US dollar stands at a three-year low, the dollar has lost value against Japanese yen and British pound as well among other currencies. Amid fears of a recession, more pressure is expected to be put on the US dollar as the Federal Reserve would be compelled at some point to lower interest rates to address recessionary pressures. Lower rates make would make holding assets in dollar less appealing, which is expected to put US dollar under even more pressure.