European currency markets saw significant movements on Thursday, with the US dollar falling against the euro and safe-haven currencies like the Japanese yen and Swiss franc returning to favour. The British pound also gained against the dollar, maintaining a rising trend since the start of 2025.

The US dollar fell to a six-month low against the euro on April 3, extending weakness for the currency seen in recent weeks.

Having started the year close to parity, the euro is now worth $1.1145.

Recession, Inflation, Retaliation?

Analysts attributed this daily in the EUR/USD exchange rate move to a number of factors.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said that the markets are adjusting to an increased likelihood of a US recession and higher inflation in the world’s largest economy.

“Not only will the US companies see their costs jump on tariffs – which will boost inflation in the US – but their revenue will probably be hit by retaliatory tariffs as well," she said.

But this was an exchange rate trend evident before April 2’s announcement of specific country tariffs.

“The expectation that the US economy will falter faster than others has been weighing heavily on the US dollar since January,” she added.

Arthur de Bonneville, a member of the multi-asset team at Edmond de Rothschild AM, supported the idea the US dollar is likely to remain under pressure, especially if the impacted countries retaliate.

“This tariff escalation raises concerns about a US recession, the impact of which would be far greater on the currency than the inflationary aspect of the tariffs themselves,” he said.

Robeco strategist Peter van der Welle said that the initial market reaction showed that currency traders immediately concluded that the move will damage the US economy.

“This shows the market is cognizant of the ultimate self-defeating impact of these tariffs for the US economy. As many economists have pointed out, trade balance deficits can’t be resolved through tariff policy,” he said.

Morningstar’s senior US economist, Preston Caldwell, described the tariffs as “a self-inflicted economic catastrophe for the US”.

Europe Responds to Tariffs, Gets Ready to Spend

As well as potential retaliation, the prospect of regional self-help measures could support the euro against the dollar, commentators added. On April 2, the European Union announced potential support measures in case the negotiations fail and if the US tariffs become too punitive.

Luigi De Bellis, head of the research team at EQUITA, said that the euro’s gains could continue as global investors reposition to Europe, where stock market gains have been impressive this year and the largest governments like Germany have shown a willingness to expand their fiscal policies.

“It is still too early to draw definitive conclusions, but this trend could continue in the short term,” he added.

Tariffs Wars Mean a Change in Currencies, Capital Flows

J. Safra Sarasin Chief Economist Karsten Junius said that the uneven nature of the tariffs could change the dynamics of the currency markets. For example, the UK was hit with a 10% tariff rate, but other countries beyond the eurozone faced even higher levies.

“Currencies of economies that have to face tariffs higher than 10% should be affected, as US tariffs reduce the demand for foreign currencies,” he said.

Brij Khurana, fixed Income portfolio Manager at Wellington Management, said that the tariffs could also see a reversal of capital flows in the global financial system.

“Many countries have deployed their current account surpluses into US financial assets. The tariffs will certainly cause these countries to consider bringing capital home to domestic markets, which would weaken the US dollar as well as the assets they have financed, primarily US stocks and credit securities.”

US debt refinancing in 2025 will also be a factor in the coming months, said Alessandro Vitaloni, senior portfolio manager at Symphonia SGR.

“Excessive depreciation of the dollar combined with high volatility could be a problem, so it will be crucial for the US government to stabilize the exchange rate at certain levels to avoid too much volatility and be able to refinance domestic debt.”

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