Trump’s tariff strategy backfires, weakening the dollar and putting added strain on European industries
The euro’s sharp rise in value against the U.S. dollar in 2025 has triggered concern across global markets, particularly in Europe, where manufacturers are grappling with a significantly altered trade landscape. Despite intentions to strengthen the dollar through aggressive trade policies, President Donald Trump’s tariffs appear to have had the opposite effect, leading to a 13% drop in the U.S. currency against the euro and over 8% against the Japanese yen since the beginning of the year.
Economists and market analysts point to a complex mix of economic and political factors behind the dollar’s decline. A decade of strong performance left the currency overvalued, and with growth prospects in the eurozone and Japan now improving, many investors are reallocating capital away from the U.S. and into more stable or promising international markets.
Yet the tipping point came after Trump’s return to the White House in January. His swift reintroduction of sweeping tariffs on global imports not only shook investor confidence but also created a volatile climate that drove investors toward perceived safe-haven currencies like the euro, yen, and Swiss franc, as well as gold, which hit a record high in April.
European Exporters Face “Painful” Double Hit
The euro’s appreciation comes at a particularly difficult time for EU exporters. Trump’s tariff threats — including a potential 50% levy on European imports if no trade agreement is reached by July 9 — have left many in the region racing to renegotiate terms. Currently, most European goods face a 10% base tariff, with additional 25% taxes on steel, aluminum, and automobiles.
Economists such as Gian Maria Milesi-Ferretti, from the Brookings Institution, warn that the combination of a strong euro and heightened tariffs could be “painful” for exporters, particularly in automotive and pharmaceutical sectors. “The U.S. dollar pricing of European products is likely to increase,” he notes, “which means losing competitiveness in a vital market.”
German industrial machinery, widely used in American manufacturing, is also at risk. According to Thorston Beck, head of the Florence School of Banking and Finance, a rise in machinery costs would inflate the prices of final goods in the U.S., contributing to domestic inflation and potentially dragging down U.S. economic growth — thereby weakening the dollar even further.
Automotive and Pharmaceutical Exports in the Crosshairs
According to Eurostat, the European Union exported approximately €532 billion ($625 billion) worth of goods to the U.S. in 2024, an increase of 5.5% from the previous year. Pharmaceuticals represented over 20% of these exports, followed by automobiles, aerospace equipment, and industrial machinery.
European automakers export around 750,000 vehicles annually to the U.S., amounting to 14% of Europe’s vehicle output and nearly 24% in value terms. Companies like Volkswagen and Mercedes-Benz are closely watching tariff developments, with rising concerns that both U.S. tariffs and the appreciating euro will erode market share.
Aircraft manufacturers are also affected. Airbus, which ships approximately 12% of its planes to the U.S., could see the cost of an A320neo rise by $10 million purely due to the currency shift, making it less competitive against Boeing’s 737 MAX.
U.S. Fiscal Woes Deepen Dollar Weakness
Trump’s tax reforms are expected to contribute between $3.1 trillion and $3.8 trillion to the U.S. deficit over the next decade. This, combined with persistent fiscal imbalances and a recent credit rating downgrade by Moody’s, has raised alarms among global investors.
The U.S. debt ceiling — set at $36.1 trillion in January — remains a contentious issue in Congress, amplifying doubts about the dollar’s long-term resilience. These fiscal vulnerabilities have prompted a broader shift toward alternative currencies, especially the euro and yen.
While the dollar continues to dominate global trade invoicing, with over 50% of transactions conducted in USD and nearly 90% of forex trades involving the greenback, confidence in its supremacy is visibly eroding.
A Fragmented Currency Future?
Some experts argue that the dollar’s current weakness could persist beyond Trump’s presidency. Although emerging powers like China and other BRICS nations are working to reduce their dependence on the dollar, analysts caution that replacing it with the Chinese yuan is unlikely in the short term.
According to Beck, the yuan lacks the institutional trust and historical depth of the U.S. dollar. “It’s very difficult to replicate decades of stability and global confidence,” he explains. Instead, Beck foresees a more fragmented monetary system, where regional currencies like the euro and Swiss franc play increasingly prominent roles in global finance.
Despite the current volatility, there remains no clear contender to unseat the dollar as the world’s leading reserve currency — at least not in the next 20 to 30 years.
