Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / How the Strong Dollar Is Splitting Eurozone Exporters
Transcript
- Lucas: Let's start with a number that's been quietly reshaping the Eurozone economy for months now: the trade-weighted dollar index hit 120.4 last week. That's up from about 119.4 just a few weeks ago. Luna: And the euro is down to 1.15 against the dollar. That's a pretty significant move in a relatively short period. Lucas: Exactly. A weaker euro should be good for Eurozone exporters — it makes their goods cheaper abroad. But here's the thing: the reality is far more split than that simple logic suggests. Luna: Because not every exporter benefits the same way. And some sectors are actually getting hit. Lucas: Right. German manufacturers, for example, are heavy importers of raw materials and intermediate goods priced in dollars — think energy, chemicals, certain metals. When the dollar strengthens, their input costs rise, squeezing margins even if export volumes hold up. Luna: So the weaker euro is a double-edged sword for them. Meanwhile, southern European economies like Spain and Portugal — they're less reliant on dollar-denominated imports, and they've got tourism. Lucas: That's the key divergence we're seeing. Spanish tourism is booming this summer, fueled in part by Americans whose dollars go further. Hotel prices have been driving services inflation across the Eurozone, as we talked about a few episodes ago, but the strong dollar is amplifying that for countries with large travel sectors. Luna: Let's look at the macro picture. Eurozone real GDP growth annualized came in at 2.1 percent for the first quarter of 2026, up from just 0.5 percent in the prior quarter. That's a big jump. Lucas: It is. And nominal GDP hit 31.87 trillion dollars. But the composition of that growth matters a lot. A strong dollar is helping some countries outperform while others lag. Luna: Which countries are the winners and losers right now? Lucas: On the winner side: Spain, Italy, and to a lesser extent France. Their services exports — tourism, hospitality, business travel — are surging. The weak euro makes a trip to Barcelona or Rome cheaper for Americans, and that's showing up in the trade data. Spain's tourism receipts are up sharply year-over-year. Luna: And the losers? Lucas: Germany is the clearest example. Its export model relies on selling high-value machinery, autos, and chemicals to global markets. But many of those supply chains have dollar costs. Plus, demand from China is soft, and the strong dollar means emerging markets — big buyers of German capital goods — are facing tighter dollar financing conditions. Luna: So the classic 'weak euro helps exporters' story is really more nuanced now. Lucas: It's almost inverted for some industries. For German automakers, the weak euro might boost revenue when converted back to euros, but their dollar-denominated input costs are rising faster. And they're facing competition from Asian rivals whose currencies have depreciated even more against the dollar. Luna: Right, the yen is at 161 per dollar. That's extremely weak. So Japanese exporters have an even bigger cost advantage. Lucas: Exactly. And that's the thing — the Eurozone isn't competing in a vacuum. The trade-weighted dollar index at 120.4 reflects broad dollar strength, not just against the euro but against most currencies. So even within the Eurozone, the impact varies depending on a country's trade partners and industry mix. Luna: Speaking of which, how are the ECB and national governments responding? The ECB has been cutting rates gradually, but the strong dollar complicates that. Lucas: It does. The ECB's deposit rate is now at 2.5 percent, down from 4 percent in mid-2024. But if the euro weakens further, that could import inflation through higher import prices. Core inflation in the Eurozone has been sticky — it was 3.4 percent in May according to the Fed's preferred gauge, but Eurozone core inflation is similarly stubborn. Luna: So the ECB is in a bind: cut more to support growth, or hold steady to prevent imported inflation from the weak euro? Lucas: That's the tension. And it's playing out differently across member states. Germany would probably prefer a stronger euro to lower input costs. Spain and Italy might be happy with the current weak euro because it boosts their tourism and services exports. Luna: And that divergence makes it hard for the ECB to set a one-size-fits-all policy. Lucas: Exactly. This is the classic optimal currency area problem in real time. When the dollar strengthens, it doesn't hit the Eurozone uniformly. Countries with large manufacturing sectors tied to dollar-priced inputs suffer. Countries with large services and tourism sectors benefit. And the ECB has to navigate that. Luna: One interesting data point: the Eurozone services trade surplus has been widening. That's the flip side of the strong dollar — American tourists spending in Europe, European companies providing consulting and software services to US clients. Lucas: Right. The services surplus is partially offsetting the goods trade deficit that some countries are running. For the Eurozone as a whole, the current account is still in surplus, but that masks a lot of internal variation. Luna: If you're an investor looking at European ETFs — like VGK or EZU — does this divergence matter for stock selection? Lucas: Absolutely. Country-specific ETFs have been diverging. EWI, the Italy ETF, has outperformed EWG, the Germany ETF, this year. Italian stocks have more exposure to financials and tourism, less to autos and chemicals. German stocks are more cyclical and sensitive to the strong dollar headwind. Luna: So the strong dollar is really a tale of two Europes right now. Lucas: And that's the key takeaway for our listeners. If you're watching the euro-dollar exchange rate, don't just think 'weak euro equals Eurozone exports good.' It's much more granular. The strong dollar is creating winners and losers within the currency union, and those dynamics are likely to persist as long as the dollar remains elevated. Luna: What would change the picture? If the Fed starts cutting rates more aggressively, the dollar could weaken. Lucas: That's the big unknown. The Fed's preferred inflation gauge came in at 3.4 percent in May, still above target. So the Fed is in no rush to cut. Meanwhile, the ECB is more dovish. That interest rate differential is a big reason the dollar is strong. Until that shifts, the strong dollar story continues. Luna: And that means the divergence within the Eurozone will likely widen. Lucas: Right. And if you've been finding these economic connections useful — the way we try to tie together currency moves, trade data, and what they mean for your portfolio or your understanding of the world — I'll just mention that listener support is what keeps this show ad-free and independent. If you'd like to help us keep doing this, you can find us at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small thing that makes a big difference for us. No pressure, just if you enjoy the show. Lucas: Back to the dollar. One more angle: the strong dollar is also affecting European government bond yields. We've seen a decoupling between core and periphery yields, with Italian and Spanish bonds yielding more relative to German bunds. That's partly because the strong dollar makes dollar-denominated debt more attractive, so investors demand a premium to hold euro-denominated bonds from weaker economies. Luna: So the strong dollar is even feeding into sovereign bond spreads. Lucas: Exactly. It's a reminder that in a globalized financial system, a currency move can ripple through asset prices in ways that aren't immediately obvious. The ECB might not be able to ignore this for long. Luna: What should we watch for in the coming weeks? Lucas: Keep an eye on the euro-dollar exchange rate. If it breaks below 1.12, that would be a significant level. Also watch the German IFO business climate index — it's been weakening, and the strong dollar is a factor. And of course, any shift in Fed rhetoric could change the whole dynamic. Luna: So the strong dollar is not just a market story — it's a real economy story that's reshaping the Eurozone from within. Lucas: That's the bottom line. The next few months will tell us whether this divergence is temporary or structural. But for now, the strong dollar is splitting the Eurozone in plain sight.