With tariff threats resurfacing, the 'Sell America' narrative is likely to return to the spotlight — despite Trump delaying EU tariffs until July. Nevertheless, uncertainty remains, and the euro may benefit from its status as the world’s second most liquid currency.

EUR: Second liquid currency

Due to the lack of major domestic data releases over the past week, EUR movements were largely driven by USD dynamics. Indeed, ongoing concerns about US fiscal health supported the EUR, as seen in EUR/USD and other EUR crosses. However, Trump’s latest tariff threats rattled European FX markets before the weekly close (as discussed in the USD section). Despite the initial sell-off, most European currencies managed to rebound slightly—likely due to skepticism about whether the proposed 50% tariffs will actually be implemented. That said, uncertainty persists. As a reminder, the EU has already prepared several retaliatory tariff measures scheduled to take effect on 14 July. Should talks fully collapse, the EU could escalate further with tighter regulations on US tech firms, delayed licensing, restricted public procurement access, and limitations on IP rights and investment flows under the Anti-Coercion Instrument. Economically, a 50% US tariff on European goods could shave around 0.6 percentage points off eurozone GDP. Following Trump’s latest threat, markets increased their ECB rate-cut expectations, now pricing in three cuts in 2025 and a December deposit rate of around 1.6% (down from 1.72% prior to the remarks).

That being said, the underlying fundamentals for the EUR remain well supported, bolstered by a more resilient eurozone economic outlook on the back of expected aggressive fiscal stimulus—even amid the looming threat of a trade war with the US. European assets remain relatively undervalued compared to US counterparts. Moreover, European investors—who have accumulated large, mostly unhedged, US asset positions in recent years—are beginning to rebalance their portfolios. Rising concerns over US fiscal health, the USD’s reserve currency status, and renewed trade tensions with the EU may further support the EUR as the most viable and liquid alternative to the USD, despite possible near-term weakness in European FX.

Looking ahead, the EUR calendar remains light, with no major market-moving events scheduled. As a result, EUR is likely to continue following broader global developments. In the near term, renewed trade tensions could weigh on European FX, but may offer buy-the-dip opportunities as the EUR could still benefit from its liquidity and relative stability in the current macro environment.

USD: ‘Sell America’ again?

Over the past week, the US dollar remained under pressure, driven by two key developments. Firstly, Moody’s downgraded the US credit rating from AAA to Aa1+, citing concerns over limited budget flexibility and persistently large fiscal deficits, which are increasing the government’s debt and interest burden. Additionally, the House Rules Committee passed President Trump’s tax and spending bill, a bearish factor for US Treasuries (USTs) as it would further elevate the US debt level. The US 30Y yield briefly touched 5.135% last week before retreating back to the 5% level. Secondly, renewed trade tensions resurfaced after Trump threatened Apple with a 25% tariff and announced 50% tariffs on the EU, set to take effect on June 1st. He also stated he is not seeking a deal with the EU. In response, the EU trade chief said the bloc is prepared to defend its interests, indicating a swift resolution is unlikely. As a result, the combination of fiscal concerns and renewed trade uncertainty could revive the ‘Sell America’ narrative in the week ahead, pressuring the USD further in the near term.

Looking ahead, market attention will turn to upcoming US data releases: consumer confidence, GDP, and April core PCE—the Fed’s preferred inflation gauge. Notably, following softer-than-expected April CPI and PPI prints, the PCE report could further support the view that the disinflation process is on track. Fed Chair Powell recently indicated that April PCE is likely to come in around 2.2% y/y, although this estimate may not yet incorporate the weaker PPI data. Overall, the baseline outlook for the USD remains bearish for now. While much of the negative news is arguably priced in, the reemergence of trade tensions adds further downside risk to the dollar in the near term.