Euro soars as US Dollar suffers historic drop - Commerzbank

The euro surged to multi-year highs against the dollar as markets reversed optimism from the tariff pause and grew increasingly wary of political and institutional risks in the US. Concerns over trade uncertainty, Fed independence, and softer inflation data are weighing heavily on the greenback, Commerzbank's FX analyst Volkmar Baur notes.

Tariff pause fails to calm structural concerns

"After Wednesday's sudden rally, the market went back into risk-off mode yesterday, putting pressure on the US Dollar. The greenback lost almost 2% on a trade-weighted basis, while the euro gained 2.3% against the USD. Since the beginning of the millennium, the US dollar has only declined more than yesterday on six days, while the euro has had its tenth best day against the US currency over the same period. At over 1.13 this morning, the euro is trading stronger against the US dollar than at any time since the beginning of 2022."

"First, the positive stock market reaction to Wednesday's announcement of the tariff pause was probably overdone. Yesterday, the market realised that while this means a temporary easing of the situation, nothing has changed structurally. Moreover, the imports that are not affected by a tariff pause are significant. If we take imports from Mexico, Canada and China together, and add in car imports that do not come from these three countries, this alone accounts for almost 50% of US imports. And for China, the tariff rate has been raised again."

"And secondly, the Chief Justice of the US Supreme Court, John Roberts, has ruled in favour of the US President for the time being, allowing him to fire the heads of so-called independent agencies. This may not sound particularly interesting for the capital markets until you realise that the Fed also falls into this category. The two cases in question are now likely to be heard by the Supreme Court, increasing the risk that the Fed's independence could be significantly and irreversibly damaged."