Euro eyes dollar’s throne as Trump unsettles markets, ECB Chief Lagarde sees opening

European Central Bank President Christine Lagarde sees a unique opportunity for the euro to challenge the US dollar’s global dominance, as erratic trade policies from US President Donald Trump continue to unsettle markets and investors.

Speaking in Berlin on Monday (May 26), Lagarde argued that Trump’s unpredictable actions and tariff threats against global trade partners have opened up a “prime opportunity” for Europe to elevate the international role of the euro. She highlighted the potential benefits Europe could reap, including lower borrowing costs, protection from currency fluctuations, and reduced vulnerability to sanctions.

“The ongoing changes create the opening for a ‘global euro moment,’” Lagarde said. “This is a prime opportunity for Europe to take greater control of its own destiny. But this is not a privilege that will simply be given to us. We have to earn it.”

Lagarde pointed out that while the US dollar faced previous challenges, notably when President Richard Nixon suspended dollar convertibility into gold in the 1970s, no strong alternative currency existed at the time. Today, however, the euro provides a credible alternative. Investors’ growing unease with Trump’s tariff threats and trade disruptions have contributed to selling off the dollar, inadvertently boosting the euro— a phenomenon Lagarde described as “counterintuitive” but justified given current circumstances.

The ECB’s latest report found the euro’s international role remained broadly stable throughout 2023, but Lagarde emphasized several key areas essential to strengthening its global stature.

Firstly, she called for a solid geopolitical foundation, emphasizing Europe’s commitment to open trade supported by robust security capabilities. Secondly, Lagarde urged the completion of the European single market, including fostering start-ups, trimming excessive regulations, and advancing the savings and investment union, despite slow progress in these areas.

She also argued for increased joint financing at the European level, particularly for defense and other public goods, to provide investors with a deeper and safer pool of European securities. This echoes the sentiments of ECB Executive Board member Isabel Schnabel, who has stressed the need for a significant European bond market as a precursor to enhancing the euro’s international position.

“Economic logic tells us that public goods need to be jointly financed,” Lagarde explained. “And this joint financing could provide the basis for Europe to gradually increase its supply of safe assets.”

Finally, Lagarde emphasised maintaining a robust legal and institutional framework to reassure global investors and uphold their long-term confidence in the euro.

Meanwhile, currency markets reacted swiftly to the volatile US trade policy landscape. Trump recently set a July 9 deadline for a trade deal with the European Union, temporarily pulling back from a threat of a 50% tariff, leading to a short-term boost for both the euro and the dollar against safe-haven currencies.

Despite this brief market respite, Trump’s unpredictability continues to influence global financial confidence, offering the eurozone a strategic chance to position the euro as a stable, reliable alternative to the increasingly volatile dollar.

With inputs from agencies