Why Europe's Capital Might Shield the Euro From Trump

Recent trade threats from President Donald Trump against Europe may have a limited impact on the euro, according to a Deutsche Bank AG strategist. The reason lies not in trade itself, but in the United States' deep reliance on European capital.

Europe's $8 Trillion Financial Leverage

George Saravelos, Deutsche Bank's global head of FX research, highlighted in a client report that Europe is effectively the largest lender to the US. European nations collectively own $8 trillion in US bonds and equities, a figure nearly double that of the rest of the world combined.

This financial interdependence creates a unique dynamic. "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," Saravelos noted.

The Growing Risk of a "Dollar Rebalancing"

The recent tensions could accelerate a strategic shift away from the US dollar. Saravelos suggests that the latest developments have the "potential to further encourage dollar rebalancing" among European investors and institutions.

He argues that the weaponization of capital flows would be far more disruptive to global markets than conflicts over trade. This is especially true given that the "US net international investment position is at record negative extremes," making the mutual dependence between European and US financial markets higher than ever.

A Catalyst for Political Unity?

Paradoxically, Trump's new tariff threats could also foster greater political cohesion within Europe. According to Saravelos, this increased unity could provide another layer of support for the euro, preventing any negative fallout against the dollar from being sustained.

What to Watch: The EU's Response

The immediate focus now shifts to Europe's reaction. "The key thing to watch over the next few days," Saravelos stated, is whether the European Union decides to activate its anti-coercion instrument.

According to a person familiar with the matter, French President Emmanuel Macron is expected to request that the EU deploy this tool in response to the US threats.