Despite ongoing risks to economic growth in the eurozone, the escalating tension between the United States and Europe over Greenland is creating a favorable backdrop for the euro against the dollar.
The immediate threat of a 10% tariff on imports from eight European countries by the United States has receded following its withdrawal amid signals of a potential deal. However, the episode reminded markets that trade and political uncertainty is back on the table, leaving investors on alert.
According to Bank of America, the EUR/USD pair is currently influenced by two opposing forces. On the one hand, the bilateral escalation threatens Europe's economic growth, which typically weighs on the euro. On the other hand, Europe’s role as a key source of financing for the US current account deficit means that rising tensions may impact the dollar more adversely.
Recent market dynamics suggest that the second factor is currently prevailing. During the latest wave of anxiety, US stocks fell, yields increased, volatility spiked, and contrary to classical logic, EUR/USD moved upward.
BofA notes that the market's reaction was more subdued than in April 2025. This reflects both a reduced surprise effect and expectations of possible de‑escalation. Nonetheless, the overall trend remained unchanged, with the euro strengthening.
Historically, the single currency tends to rise after sudden tariff escalations involving the EU. According to the bank's estimates, the average additional growth compared to the trend was around 1% per week following such events. Analysts also point out that there has been a shift in market logic. Higher real yields in the US no longer guarantee a stronger dollar against the euro.
The economic impact of a possible return to tariffs is likely to be limited unless measures affect the entire EU. The eight targeted countries account for about 11% of US imports, and their participation in the single market allows for the redirection of trade flows. The more significant costs may arise from prolonged uncertainty, which could dampen investment activity in Europe.
Medium‑term factors also favor the euro. Bank of America emphasizes that growing political support for fiscal spending in Europe is bolstering demand for the euro, especially against the backdrop of substantial US investments in artificial intelligence. A coordinated EU response, particularly with a focus on services rather than goods, could further support the European currency if the escalation remains manageable.