Stock markets bore the brunt on Monday of fears that the trade war could re-escalate, with European equities dropping over 1% and U.S. stock futures taking a similar hit that points to weakness following Monday’s public holiday.
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The euro bounced from its lowest since late November, along with sterling and Scandinavian currencies. The Swiss franc , a classic safe haven, headed for its largest daily rise against the dollar in a month.
“I’m sure that there are a lot of people that are fairly aghast at what happened over the weekend and probably thinking about how they hold their assets,” said Francesca Fornasari, head of currency solutions at Insight Investment.
She said the dollar could move lower but was also supported by a strong U.S. economy and U.S. shares.
A pending U.S. Supreme Court ruling on the legality of Trump’s tariffs and uncertainty on how European capitals will respond also blur the picture.
“For the most part so far it would appear to be more noise than signal at this point,” said Leonard Kwan, fixed income portfolio manager at T Rowe Price.
WILL EUROPEAN INVESTORS DUMP U.S. ASSETS?
While deep and liquid U.S. capital markets – the Treasury market alone is worth $30 trillion – make diversification for international investors hard, the U.S. is also vulnerable to foreign outflows, analysts said.
European countries are the United States’ biggest creditor, owning $8 trillion worth of equities and bonds, almost twice as much as the rest of the world combined, said Deutsche Bank.
“In an environment where the geoeconomic stability of the Western alliance is being disrupted existentially, it is not clear why Europeans would be as willing to play this part,” Deutsche Bank’s global head of FX research George Saravelos wrote.
The question is whether European investors would sell and what that would take.
ING said that there would be little the EU could do to force European private sector investors to sell dollar assets, it could only try to incentivise investments in euro ones.
Analysts noted that the market backdrop is very different to last April, given the dollar has fallen since then and the economic outlook has improved, while it remains difficult to diversify away from the dollar.
The greenback, which plunged nearly 10% in 2025 against peers, has stabilised in recent months. Investors have unwound last year’s bets against the dollar and hold a modestly bullish position worth just $240 million, meaning sentiment could shift again.
“The situation probably needs to escalate a fair bit further before they (European public sector investors) damage their investment performance for political purposes,” said Societe Generale’s head of FX strategy Kit Juckes.
It added that appetite to diversify portfolios remains strong among the bank’s clients given U.S. risks.
“None of this necessarily implies a disorderly rotation, but we believe that it does tilt the balance of risks more towards incremental diversification into international equities,” Barclays said.
Even if European assets could potentially benefit from shifts away from the U.S., Trump’s tariff threats renew uncertainty for Europe’s economy.
Capital Economics said the countries most exposed to increased U.S. tariffs were the UK and Germany, estimating that a 25% tariff could knock 0.2%–0.3% off their output.
Economists warned the full economic impact could be larger given uncertainty and potential EU retaliation.
“Most investors think this is going to be a good year for the economy. There is over-confidence and therefore some fragility building,” said Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson.
Reporting by Yoruk Bahceli, Dhara Ranasinghe, Amanda Cooper, Gregor Stuart Hunter, Naomi Rovnick, and Alun John, Writing by Yoruk Bahceli; Editing by Dhara Ranasinghe and Susan Fenton
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