A U.S.-EU Currency War? The “Global Euro Moment” Rises as the Weak Dollar Endures

TradingKey - Although tensions in the U.S.-EU tariff war have eased, the era of U.S. exceptionalism continues to fade, with the U.S. dollar weakening in response to President Donald Trump’s aggressive tariff hikes and expansionary fiscal policies.

Now, European Central Bank (ECB) President Christine Lagarde has called for a “Global Euro Moment”, signaling that Europe may be entering a new phase — one that could mark the beginning of a fresh currency conflict between the U.S. and Europe.

On Monday, May 26, Lagarde stated during a speech that Trump’s erratic policy moves have created a unique opportunity to strengthen the euro’s global standing — potentially allowing the eurozone to enjoy some of the privileges previously reserved for the United States.

Lagarde emphasized that if European governments can address long-standing structural issues limiting economic potential, they would benefit from lower borrowing costs, reduced currency volatility, and greater resilience against sanctions.

The ECB chief argued that current global conditions are ripe for a “Global Euro Moment”, and that by pursuing open trade, stronger defense, regulatory reforms, and improved legal frameworks, Europe can rebuild investor confidence in its long-term value and reinforce the euro’s international role.

Dollar Declines, Euro Gains

As of Q3 2024, the U.S. dollar’s share in global official reserves had declined from 63.5% in Q3 2017 to 57.4%, while the euro has remained stable around 20%. Meanwhile, the RMB rose from 1.1% to 2.2% over the same period.

So far in 2025, global financial markets have experienced two major shocks due to concerns over Trump’s tariff policies and fiscal deficits. The DXY U.S. Dollar Index has fallen sharply from 110 at the start of the year to 99, while the EUR/USD exchange rate has risen from around 1.02 in January to a high of 1.15, currently trading at 1.1320.

Even though trade tensions have eased and the U.S. Congress is advancing Trump’s “Beautiful Big Bill”, Wall Street has not fully abandoned its bearish stance on the dollar.

On May 23, UBS released a report stating that the U.S. dollar may continue to weaken, citing three key reasons:

1. The pro-dollar combination of expansionary fiscal policy and tight monetary policy is no longer sustainable.
2. The unsustainable U.S. twin deficits (budget and current account) will weigh on the dollar medium-term.
3. Ongoing concerns about the independence of the Federal Reserve persist.

As a result, UBS downgraded the dollar to “unattractive”, advising investors holding non-USD assets to take action to reduce excess USD cash exposure.