Every year around this time, European central bankers invite their global counterparts to the historic castle-palace of Sintra in Portugal. The topic? Financial stability and the fate of the euro. This year, discussions at this annual symposium—technically organized by the Central Bank of Portugal but effectively a think tank for the ECB—are focused on one big issue: what’s next for the “expensive” euro.
The euro has already appreciated by about 14% against the dollar, which means it has effectively increased tariffs by that amount, countering the 10% tariffs imposed by U.S. President Donald Trump. These tariffs could rise further if no deal is reached by July 9, when Trump’s deadline expires.
At the Sintra meeting, some central bankers, including ECB Chief Economist Philip Lane and ECB President Christine Lagarde, have expressed satisfaction with the euro’s appreciation, citing its strengthening international standing. But the reality is more complex. The euro hasn’t necessarily gained strength—it’s the dollar that has weakened. In fact, the euro fell from second to third place among currencies used as foreign exchange reserves by central banks, overtaken even by gold.
In an environment where U.S. tariffs are already limiting the export capacity of the Eurozone, the simultaneous appreciation of the euro makes the trade balance even more difficult. The only area where the stronger euro helps is in reducing import inflation, particularly for LNG from the U.S., although Europe is now paying two to three times more than it used to pay for Russian gas.
But elsewhere, the weaker dollar threatens to drown the European trade balance. And according to officials from the U.S. Federal Reserve speaking at Sintra, tomorrow might be even worse.
Federal Reserve Chair Jerome Powell—who Trump has called “a fool”—explained that tariffs are contributing to higher inflation in the U.S., forcing the Fed to remain cautious about rate cuts. Moreover, America’s unsustainable budget deficit, likely to grow under Trump’s proposed budget law, suggests further downward pressure on the dollar.
This uncertainty leaves the euro in a precarious position. While the ECB believes the euro can withstand a rate up to $1.2 per euro, it is already trading near $1.17, close to breaking point.
Much will depend on what happens next, especially at the Jackson Hole symposium in August, where Powell may give his last major speech before potentially being replaced by a Trump loyalist—a move that could signal even greater volatility ahead for the euro.