Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why the Euro Holds Steady While the Dollar Strengthens
Transcript
- Lucas: So the dollar is having a moment. The trade-weighted dollar index just hit one hundred twenty point five, up steadily over the last few months. Yet the euro is trading at one point one four dollars, and it's been flat — barely moved in weeks. Luna: That is odd. Normally when the dollar rallies, the euro gets crushed. What's holding it up? Lucas: The short answer is the Eurozone's current account surplus. It's massive — roughly three hundred fifty billion euros on an annualized basis as of the latest data. That means Europe, as a bloc, earns more from exports and investments than it spends abroad. Those euros have to come back and buy European assets or just stay as euros, which supports the currency. Luna: So it's a structural factor — not something the ECB is doing? Lucas: Partly structural, but the ECB is helping. They've kept the deposit rate at three point seven five percent since March, and they've signaled no cuts until services inflation drops below three percent. That's a higher for longer stance compared to the Fed, which is actually expected to start easing by early next year. That rate differential normally would weaken the euro, but the surplus is overwhelming it. Luna: Right — rate differentials usually drive currencies, but the current account is dominating. So flows from exports and investment income are more powerful right now than speculative capital? Lucas: Exactly. Look at Germany — it still runs a trade surplus of about two hundred billion euros annually, even with the industrial slowdown. And the euro's relative stability is also attracting inflows from central banks diversifying reserves away from the dollar. The IMF's latest COFER data shows the euro's share of global reserves ticked up to twenty point six percent, the highest in three years. Luna: That's interesting because US tariffs are supposedly hurting European exporters. Doesn't a strong euro make exports even harder? Lucas: It does, but the export picture is nuanced. Yes, goods exports to China and the US have softened — especially machinery and chemicals. But services exports are booming. Tourism, consulting, software — those are less price-sensitive and benefit from a strong currency. And the Eurozone still runs a huge surplus in services. Luna: Plus American tourists coming to Europe get a stronger dollar. That's a windfall for southern European economies like Greece, Spain, and Portugal. Lucas: Absolutely. The euro being flat at one point one four means a US tourist gets about twelve percent more euros than they did two years ago when the euro was near parity. That's been a huge boost for hospitality and retail in the eurozone periphery. Luna: But what about the ECB's own projections? They must be watching the exchange rate closely. Does this flat euro complicate their fight against inflation? Lucas: It does, but in a good way. If the euro had weakened sharply, import prices — especially energy and intermediate goods priced in dollars — would have surged. That would reignite inflation. A stable euro means the ECB doesn't have to worry about an imported inflation channel right now. The latest data shows import prices from China hit their highest since 2008, but that's mostly due to Chinese costs, not the exchange rate. Luna: So the euro is acting as a shock absorber. A weaker euro would have made that Chinese import price spike even worse. Lucas: Precisely. And let's not forget the political dimension. With Trump threatening new tariffs — like the forced labor justification tariff on Friday — a stable euro reduces the risk of a currency war. It's harder for the US to accuse Europe of manipulating its currency when the euro isn't moving. Luna: But there's also the other side: Eurozone corporations that borrowed in dollars. A stable euro means their repayment costs are predictable. Remember episode one twenty about companies borrowing in dollars? They're breathing easier. Lucas: Good point. So the euro's resilience is actually supporting corporate balance sheets. Now, the big question is: Can this last? Because if the European economy continues to slow — manufacturing PMI is still below fifty in Germany — and the ECB eventually cuts rates, the surplus might not be enough to hold the line. Luna: Especially if the Fed cuts more slowly than expected. The divergence could widen again. Lucas: Right. The market is pricing in about seventy-five basis points of ECB cuts by mid-2027. If that materializes, the rate differential could shift against the euro. But for now, the current account surplus is the anchor. Luna: So the takeaway is: Don't bet against the euro just because the dollar is strong. There's real underlying demand for European assets and cash flows. Lucas: If today's episode gave you a clearer picture on how currencies really move — beyond the headlines — that's exactly why we do this. And the way these stay free and ad-free is through listener support. If you find value in this kind of breakdown, you can head to buy me a coffee dot com slash fexingo. It helps us keep digging into topics like this. Luna: Yeah, it really does make a difference. Even a small contribution helps maintain the independence of the show. So if you're in a position to, consider that. Lucas: So to bring it full circle: The euro-dollar is a tug of war between surplus-driven demand and monetary policy expectations. Right now, the surplus is winning. But that could flip if the ECB cuts aggressively. We'll be watching the August ECB meeting and the Jackson Hole speeches for signals. Luna: And the September US inflation data. That always moves the needle. Lucas: Exactly. Thanks for sticking with us.