BELGRADE, Feb. 1 (Xinhua) -- The euro has strengthened sharply against the U.S. dollar in recent months, raising concerns across Europe that currency appreciation could weigh on exports and complicate the region's economic recovery.
As of Jan. 31, the euro was trading at around 1.19 against the U.S. dollar, hovering near recent highs after briefly breaking above 1.20 on Jan. 27, its strongest level since June 2021. Over the past year, the euro has appreciated by about 14.4 percent, driven by uncertainty surrounding U.S. economic policy and heightened investor risk aversion.
Several European Central Bank (ECB) policymakers have voiced concern over the pace of euro appreciation. ECB Vice President Luis de Guindos said that a further rise in the exchange rate would add complexity to monetary policy operations. Bank of France Governor Francois Villeroy de Galhau noted that while dollar weakness reflects declining market confidence in U.S. economic policy, a stronger euro could further dampen price growth at a time when inflation remains below the ECB's 2 percent target. Austrian National Bank Governor Martin Kocher said sustained euro strength could force the ECB to reassess its policy stance amid pressure on both growth and price stability.
Currency appreciation has already weighed on Europe's external sector. According to data released by Eurostat in January, eurozone exports to the rest of the world totaled approximately 240.2 billion euros in November 2025, down 3.4 percent year on year. Over the same period, the trade surplus narrowed to 9.9 billion euros from 15.4 billion euros a year earlier. Eurozone inflation eased to 1.9 percent in December 2025, remaining below the ECB's target.
Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics, said that euro appreciation directly weakens the competitiveness of European manufacturing exports and has become an important factor weighing on the region's economic recovery.
The impact has been particularly evident in export-oriented economies. Germany, whose growth has long relied on manufacturing exports, has faced growing pressure from currency movements. German Chancellor Friedrich Merz said that dollar weakness has reduced the price competitiveness of German products in international markets.
Dirk Jandura, president of the German Wholesale and Foreign Trade Association, said medium-sized companies, with limited hedging capacity, are more vulnerable to rising costs caused by exchange-rate volatility. He noted that after two consecutive years of economic contraction, Germany has seen only limited recovery, with euro appreciation further squeezing corporate profit margins.
Dollar weakness may also affect the eurozone through financial channels. Mark Branson, president of Germany's Federal Financial Supervisory Authority (BaFin), said financial markets may increasingly question the U.S. dollar's role as the world's primary reserve currency. He warned that European banks' reliance on short-term U.S. dollar refinancing to service liabilities could face liquidity bottlenecks during periods of market volatility.
ECB monetary policy is now facing fresh challenges. According to an analysis by Italy's Institute for European Policy Making, long-term interest rates in Europe remain above nominal economic growth, while the ECB has accelerated balance-sheet reduction even as the U.S. Federal Reserve has slowed the pace of quantitative tightening. This divergence has loosened dollar liquidity relative to the euro, attracting capital inflows into eurozone markets.
ECB President Christine Lagarde said that the relatively limited size of Europe's bond and equity markets makes it difficult for the financial system to fully absorb short-term capital inflows, adding to upward pressure on the euro.
ECB projections released in December 2025 show that if the euro rises to 1.21 against the U.S. dollar, eurozone inflation and real GDP growth in 2026 would each be reduced by about 0.1 percentage point.
Upward pressure on the euro may persist. Morgan Stanley said in a recent report that the euro could reach 1.23 against the U.S. dollar in the second quarter of 2026 as unconventional factors continue to weigh on the greenback. The bank estimated that a 5-percent appreciation of the euro against the dollar would reduce annual returns of the MSCI Europe index by about 1.5 to 2 percentage points. On a trade-weighted basis, a similar rise could reduce eurozone exports by around 1.5 percent and cut economic growth by about 0.3 percentage point.
ECB policymakers have said they will closely monitor exchange-rate developments and assess their implications for growth, inflation and financial stability amid persistent global uncertainty. ■