The recent spat tied to Greenland has given the euro a supportive trading environment against the U.S. dollar, even as the prospect of slower European growth remains an offsetting concern. Market nerves spiked when a new 10% U.S. tariff targeting imports from eight European countries was threatened, though the immediate pressure eased after the tariff proposal was withdrawn amid signals that a deal may be reached.
That episode has made clear that trade and political uncertainty are back on investors’ radars, and the risk of further escalation has not disappeared. Bank of America frames EUR/USD as sitting at the crossroads of two countervailing forces: on one side, bilateral escalation could blunt European growth and normally would weigh on the euro; on the other, renewed stress can weaken the dollar because Europe is a key funding source for the U.S. current account deficit.
Price action during the most recent scare favoured the funding-channel interpretation. Over the course of the episode, U.S. equities declined, U.S. interest rates rose and volatility increased, while EUR/USD moved higher. BofA notes that the reaction was milder than the market response in April 2025, a reflection of lower shock value and prevailing expectations of eventual de-escalation, but the directional outcome was consistent with previous tariff-related scares.
Historically, surprise tariff escalations involving the European Union have coincided with a rise in the euro. BofA’s analysis points to an average excess gain versus trend of close to 1% in the week following such events. The bank also highlights an evolving market backdrop in which higher U.S. real yields are no longer reliably translating into a stronger dollar against the euro.
From an economic-impact perspective, the direct hit of the proposed tariffs would likely be limited unless measures were extended across the entire EU. The eight targeted countries represent about 11% of U.S. imports, and many of those economies sit inside the single market, allowing trade flows to adjust. The larger drag would come from a persistent rise in uncertainty - if prolonged, that could weigh on European investment.
Looking beyond the immediate shock, medium-term political and policy factors are relevant. BofA points to growing political momentum for European fiscal spending as a support for EUR/USD, especially when contrasted with ongoing U.S. investment in artificial intelligence. The bank suggests that a coordinated EU response that concentrates on services rather than goods could further bolster the euro, provided any escalation remains contained.
For markets and sectors, the episode touches financial markets through equity and bond volatility, trade-exposed industries through tariff risk, and investment activity that could be disrupted by prolonged uncertainty. The net effect on EUR/USD will continue to reflect the balance between European growth prospects and the funding-channel dynamics that can weaken the dollar in times of stress.