Euro: US Diesel Policy Pressures Leave Euro Vulnerable – Société Générale

Kit Juckes, FX strategist at Société Générale, notes that the proposed US diesel export ban is emerging as a new pressure point for the euro. If implemented, the policy could push up European diesel prices, thereby weighing on the euro and other European currencies. Meanwhile, rising bond yields and crude oil prices are also adding headwinds. Juckes questions whether consensus forecasts for eurozone economic growth might be revised down if these pressures persist.

**Energy Costs Intensify Structural Pressures**

Europe's heavy reliance on imported energy leaves it particularly vulnerable to price shocks. George Saravelos, global head of FX research at Deutsche Bank, describes the current negative supply shock as a "direct dollar tax" that Europeans must pay to overseas producers. He estimates that for every 10% rise in Brent crude prices, the euro-dollar exchange rate depreciates by approximately 0.8%. The European Central Bank's energy price scenarios also highlight the risks: under a severe shock, crude oil prices could rise to around $132 per barrel in Q4 2026, and natural gas prices to around €130 per megawatt-hour, which would significantly alter inflation and growth paths.

**Short-Term Dollar Demand Remains Resilient**

Despite declines in US Treasuries and equities, investors remain willing to hold dollars in the current environment, particularly relative to the euro. Analysts at Société Générale believe that rising dollar-denominated commodity prices further intensify global demand for the dollar. Cross-currency swap markets also reflect increased demand for dollar liquidity funding outside the US. In the near term, strong US data and inflation risks could push the dollar index toward its 2026 highs and drive the euro-dollar pair to new lows.

**Euro Faces Stagflation Test**

The energy price shock presents the European Central Bank with a "stagflationary" dilemma—higher inflation alongside slowing economic growth—which is more complex than merely addressing demand-driven inflation and limits the support the euro might gain from rate hike expectations. If energy prices remain elevated, coupled with the risk of insufficient winter natural gas inventories, the euro could face multiple pressures from slowing growth, rising inflation, and political risks, putting its previous resilience against the dollar under more severe strain.