Exporters in the European Union are facing unexpected headwinds as the euro has strengthened in recent weeks, hurting competitiveness. The euro and dollar were trading close to parity early in the year, when Donald Trump took office for his second term as the US president.
That gap had gradually widened before the White House rowed back its war of words with the US Federal Reserve. Even that had a limited impact on the currencies, with the Euro still close to its highest level since 2021.
Bank of Ireland chief economist Conall MacCoille said that, at its most basic, the strength of the Euro makes Irish export to the US less competitive. The combination of a currency swing along with tariffs, exports from Ireland to the US means exporters will feel a squeeze on their margins, or pressure on prices.
MacCoille said: “People will have to make a decision which comes down to the question of price elasticity – can they raise prices without hurting demand?” That question is going to be different for every sector and even for businesses within sectors, he said.
“Exporters have to deal with foreign exchange movements all the time and it should be noted the dollar had been extraordinarily strong,” he added.
The currencies gap reflects increased faith in the euro-area economy – in particular the prospect of Germany boosting demand to restore growth – as well as shaken confidence in a dollar battered by radical and unpredictable policies in the White House.
But the current strength of the euro had not been a widely expected result of the Trump presidency, Mac Coille said. It had been widely anticipated that tariffs would push up inflation and interest rates and the dollar would have been strengthened. The question now is what the Trump administration’s dollar policy really is.
“You are looking at potentially very volatile policy , a huge US federal debt, negotiations over the US budget, and in the background this idea of a “Mar-a-Lago accord’ – so the dollar has gone in the opposite direction,” Mac Coille said.
The national ‘Mar-a-Lago accord’ is an idea that has been floated in financial circles, that the Trump White House could try to engineer a weaker dollar and lower borrowing costs for itself as part of a wider negotiation to re-order global finances. It hasn’t happened, or even been proposed, but the idea and the possibility that it could be tried has weighed on confidence.
The strong euro will have the biggest impact on businesses exporting certain items, such as, whiskey and butter – goods that have relatively slim margins, says Dan O’Brien, chief economist at the Institute of International and European Affairs (IIEA). It’s likely to have the least impact in sectors such as pharma, which are high margin and where sales to the US are primarily intra-company.
A strong euro is a positive for importers, he pointed out, including energy importers – and will push down inflation in the euro area, keeping the European Central Bank on course to lower interest rates further as a result.
The stability of the euro and sterling despite wider turmoil is also a positive, O’Brien said. “Sterling is hugely important for lower margin exporters and has proved very stable post-Brexit,” he said. “However, the spectre of policy-driven volatility from the White House cannot be ignored,” he added.
“There has never been a time when a major power has jumped around on policy like this. Unless there is a return to some sort of normality, then the dollar is in line for a period of weakness. However, it should be said no market is more unpredictable than currencies.”
Andy Jalil
The writer is our foreign correspondent based in the UK.
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