Record Strong Euro Not Yet Causing Problems for Most Domestic Exporters

The almost legendary ‘reciprocal tariffs’ introduced by US President Donald Trump on April 2 have an unexpected consequence that is causing additional headaches for European companies – a strong euro. In just one month, the European currency has strengthened against the US dollar by more than five percent, which has left many economists astonished. Economic logic suggests that the opposite scenario should have occurred. Previous experiences from the foreign exchange (forex) market indicate that the currency of a country affected by tariffs typically weakens, thereby largely negating the effects of more expensive exports burdened by those tariffs.

In ‘Trump’s world’, where nothing is as it was before, an unusual situation has now arisen: the value of the dollar, which ironically is considered a ‘safe haven’ among investors, has plummeted after the ‘day of liberation’. Consequently, the value of the euro has risen. According to the exchange rate list of the Croatian National Bank from May 2, one euro can be exchanged for 1.1343 dollars. In comparison, on April 1, the exchange rate was 1.0788 dollars, meaning that in one month, the value of the euro has increased by 5.14 percent. The situation is even more dramatic when looking at the value of the euro against the dollar compared to the end of last year – it is higher by as much as nine percent. For the standards of the foreign exchange market, which typically records relatively small movements among the most important currency pairs, this is a staggering jump.

Profit Erosion

In addition to Trump’s tariffs, the German government’s announced large fiscal spending package for infrastructure and defense has added fuel to the fire of the soaring exchange rate. That this is not a trivial situation is evidenced by calculations from analysts at the French bank BNP Paribas, which state that such an almost record value of the euro against the dollar, if maintained through 2025, could reduce the profits of European companies by two to three percent. In the event that a pessimistic scenario of the euro exchange rate reaching as high as 1.20 dollars occurs this year, the consequences for the EU economy would be significant. Namely, the 600 largest European companies in the STOXX 600 index generate an average of 60 percent of their revenues abroad.

Croatian exporters are thus facing a familiar story with the exchange rate. Just as they have emphasized for decades that the exchange rate of 7.5 kuna for one euro is overvalued, making them less competitive, they are now troubled by the strong European currency. Those focused on the US market are already feeling the consequences. In the daily operations of CircuitMess, the euro to dollar exchange rate plays an important role, noted Sales and Marketing Director Luka Omejc.

– I would like to compare this to the movement of the S&P 500 index: as soon as the index starts to fall, we notice that our American customers become more cautious and reduce their spending. I would assume that there is almost the same correlation with the weakening of the dollar. When the dollar loses value, we observe a more pronounced risk aversion sentiment, especially in the mid-range product segment in which we operate. This consumer sensitivity is further highlighted when multiple negative factors arise simultaneously, such as a tariff war, volatility in the S&P 500, and significant changes in the euro/dollar exchange rate. In such circumstances, we clearly see a heightened caution among American consumers and a decline in purchases from the US – added Omejc.

Macroeconomic analysts at Erste Bank emphasize that the volatility of the EUR/USD exchange rate is traditionally present and is part of the normal economic cycle.

– The movements of the EUR/USD are currently more a reflection of American factors and a lack of a clearer picture of the economic policy of the new US administration than of European strength, as the euro exchange rate against the Swiss franc and the Japanese yen has actually remained unchanged since the beginning of the year. The mentioned exchange rate movements indicate a decline in the purchasing power of the American consumer, and when we add a high level of uncertainty regarding trade policy, it is likely that in the short term, exporters oriented towards the US market will face difficulties and the aforementioned uncertainty – believe Erste analysts.

What about exports outside the eurozone? Find out in the digital and printed edition of Lider.

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