Euro: Domestic Demand Resilience Supports Euro — BNY Mellon

BNY Mellon analyst Geoff Yu stated that despite recent warnings from European Central Bank President Lagarde that the post-war growth model of Europe is being eroded by global trade fragmentation and the fading of the cheap energy era, the resilience of domestic demand in the euro area remains a key support for the euro. This assessment comes as the euro has appreciated over 11% against the U.S. dollar since the start of the year, recently trading around 1.16431.

**Dual Support from Domestic Demand and Fund Flows**

According to BNY Mellon's observations, the euro's recent rebound is not solely reliant on U.S. dollar weakness. With cross-border investors reducing hedging operations and improved spot buying, euro-denominated assets have received stable support, with total euro positioning returning to neutral levels. Geoff Yu emphasized that the relative robustness of domestic demand has strengthened broader confidence in the euro, making it stand out among major currencies.

**Lagarde's Warning and Opportunity**

Lagarde previously wrote that the global order is undergoing profound transformation, with open markets and multilateral rules facing collapse, and even the dominance of the U.S. dollar showing signs of weakening. She believes this provides an opportunity for the euro to enhance its global influence. However, BNY Mellon also noted that market confidence remains constrained by tariff pressures facing European exporters and the potential adverse effects of a stronger euro on competitiveness.

**Concerns Behind the Strength**

Although the euro area's economic scale and wealth levels are comparable to those of the United States, the euro's global usage lags far behind the dollar. The euro's exchange rate against multiple major trading partner currencies has approached multi-year highs, with some economists and corporate executives warning that continued euro strength could harm exporters already impacted by tariffs. BNY Mellon believes that while domestic demand resilience is a positive factor, uncertainty in the external trade environment remains a key variable limiting further breakthroughs for the euro.