Euro reaches strongest exchange rate against the US dollar in five years

The euro has climbed to its highest level against the US dollar in five years, remaining at the symbolic threshold of $1.20 since January 27, spurring economic debate within the eurozone and in France.

For people in the eurozone, a strong euro means improved purchasing power for dollar-priced imports, notably energy and raw materials, while it complicates the outlook for exporters.

A stronger euro also has direct consequences for the tens of thousands of American retirees living in France as dollar income now converts into fewer euros reducing their effective purchasing power for everyday expenses. 

The dollar’s weakness was reinforced on January 28 after the US Federal Reserve opted to pause further interest rate cuts, holding its key rate at between 3.5% and 3.75% despite mounting pressure from President Donald Trump to lower rates.

The Trump effect

The strength of the euro reflects less a surge in European economic momentum than a growing loss of confidence in the US dollar. 

The Dollar Index, which measures the US dollar against other major currencies, is close to a four-year low.

This relative shift has pushed the euro higher despite modest economic growth and persistent fiscal pressures in several eurozone states.

From a European perspective, the cause lies largely in Washington. 

Financial markets reacted nervously to renewed trade tensions due to Mr Trump’s recent threats of new tariffs targeting European countries for their opposition to the proposed US takeover of Greenland. 

While these threats were withdrawn, the episode, which played out publicly during the Davos forum, has reinforced concerns about policy volatility affecting transatlantic trade relations.

Investors also fear that political pressure on the US Federal Reserve could weaken the dollar further, indirectly tightening financial conditions in the eurozone through currency appreciation.

What a strong euro means in France

For the European Central Bank, the rise of the euro presents a policy dilemma.

A stronger currency helps contain imported inflation, a key concern for France following successive price shocks, but it also risks weighing on growth. 

French exporters in sectors such as aerospace, luxury goods and food are exposed to exchange-rate movements against the dollar.

Meanwhile, global investors have sought safe havens outside the dollar, with gold prices surging above $5,100 an ounce and silver close to record levels. 

If the euro remains near current levels, pressure may build on the ECB to consider further interest rate cuts, even as inflation eases.