By Craig Mellow
The more President Donald Trump's U.S. administration trash talks Europe, the better it is for the euro -- a great market paradox of the past year.
The common currency took another jump to near 10-year highs last month as the U.S. president intensified threats to annex Greenland, subsiding as he backed down. The euro is still up 14% against the dollar over the past 12 months, and 9% versus the Chinese yuan.
That is a mixed blessing for Europe. Currency appreciation has catalyzed a 30% surge in the iShares Europe exchange-traded fund over the past year. It also creates a headwind for a European Union that ran a 147 billion euro ($173 billion) trade surplus in 2024.
Or does it? The EU's trade balance for January-October 2025 ran just about even with the year before, shrugging off, for now, both the pricier euro and U.S. tariffs. European exports are tilted toward less price-sensitive premium goods, from ASML's semiconductor printers to Mercedes-Benz vehicles and Gucci handbags. "Most of the exports to the U.S. are driven by upper income groups," says Aaron Hurd, senior currency portfolio manager at State Street Global Advisors.
Even after last year's rerating, European assets look like a haven from Trump's mercurial U.S. policy and a possible implosion of U.S. tech stocks. "Europe has been an oasis of predictability, not shock and awe," says Michael Kelly, head of PineBridge Investment's multi-asset strategy.
The EU domestic economy, on par with China's as the global No. 2, is gaining some traction. Gross domestic product growth accelerated to 1.3% last year, with projections for 2026 about the same. Unemployment in the euro area is at a record low just above 6%. Inflation has tapered to 1.7% annually, which may impel the European Central Bank to cut interest rates below their current 2%.
"All of a sudden domestic demand is rising," says Jeremie Peloso, chief strategist for Europe at BCA Research. "Europe is actually in a sweet spot."
Few investors expect European stocks to match their 2025 blowout this year. The muscular euro arithmetically erodes bottom lines as the top 50 EU companies earn about 60% of their revenue outside the bloc, Peloso estimates.
Going into earnings season, analysts polled by LSEG predicted a 4% year-over-year drop in European corporates' fourth-quarter profits. "We recently closed our short-term preference for European companies because of fourth-quarter earnings," says Maximilian Uleer, head of European equity at Deutsche Bank.
Longer term, European shares and the euro remain positioned to benefit from investors' faltering faith in U.S. exceptionalism.
"Investors outside the U.S. will shift from 70% U.S. assets to maybe 60% and hedge their U.S. holdings a lot more," State Street's Hurd predicts. "That could push the euro to $1.30 over the next two-three years."
The current value is around $1.18. That is, if Trump keeps just toying with global disruption. If he follows through, no haven will be safe.
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(END) Dow Jones Newswires
February 06, 2026 21:30 ET (02:30 GMT)
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