Euro Could Rise 10% Against Dollar If Tariffs Fall

Bank of America has suggested that if the market's expectations regarding tariffs are accurate, the euro could appreciate to 1.10 or higher against the U.S. dollar. This prediction is based on the assumption that tariffs will be relatively benign, leading to a weaker U.S. dollar as negotiations are expected to result in reduced tariffs. The bank's strategists, Athanasios Vamvakidis, Adarsh Sinha, and Janice Xue, highlighted this view in their April 2 report, where they also mentioned taking a tactical short position on the euro against the British pound. This move is aimed at hedging against market complacency while avoiding the uncertainty surrounding the U.S. dollar.

The strategists noted that while the market appears complacent ahead of the U.S. tariff deadline, this complacency could still be justified. If the relatively mild market consensus on tariffs proves correct, the euro could strengthen significantly against the U.S. dollar. This is because lower tariffs would reduce the cost of imports for European countries, potentially boosting their economies and making the euro more attractive to investors. Additionally, the expectation of tariff reductions could lead to a weaker U.S. dollar as investors seek higher returns in other currencies.

The report also acknowledges the potential for unexpected actions from U.S. President Trump, who could implement more aggressive tariff measures than the market anticipates. The strategists pointed out that while the market expects tariffs on specific products, a broader tariff regime could be a negative surprise. Although high tariffs might ultimately harm the U.S. economy more than other regions, the short-term global risk aversion could still support the U.S. dollar.

In summary, Bank of America's analysis suggests that the euro could strengthen against the U.S. dollar if market expectations regarding tariffs are met. However, investors should remain cautious, as market expectations can change rapidly, and the actual impact of tariffs on the economy and currency markets may differ from current predictions. The potential for unexpected tariff measures adds an additional layer of uncertainty, making it crucial for investors to monitor developments closely.