President Trump has warned that he might impose tariffs on European countries unless the US can finalize a deal on buying Greenland by June. This has raised worries about the ongoing trade tensions between the US and the EU, highlighting the uncertainty of US trade policies. According to Commerzbank’s Head of FX and Commodity Research, even though the US dollar is strong, the current US account deficit makes it vulnerable if trade conflicts reduce capital investments. So far, tariffs have not severely harmed the economy, partly because they have not risen as much as expected. The surge in AI investments has also helped boost the market. Nonetheless, uncertainty remains, and the EU could face more serious economic issues if trade disputes escalate, which could negatively impact the euro.

Massive US Current Account Deficit

The large US current account deficit heavily relies on capital imports. If the dollar’s position as the world’s reserve currency is threatened, it could lead to fewer capital imports and even capital outflows. This might require adjustments to the US current account balance, potentially causing the dollar to weaken further. Trump’s threat of new tariffs over the Greenland situation brings back significant uncertainty. With a deadline approaching in June, we expect that political news could influence the markets in the upcoming weeks. A sudden intensification of trade disputes is still a major risk. Therefore, traders should prepare for increased volatility, particularly with the EUR/USD currency pair. Looking back at trade disputes from 2018 to 2020, we saw how quickly market sentiments shifted, making options strategies, like straddles, a smart approach. This is a time for active management, not just passive strategies. Implied volatility for three-month EUR/USD options has already increased this past week, reflecting growing market concerns. This rise is similar to what occurred in late 2025 during other geopolitical tensions. The market is clearly anticipating a bumpier period ahead.

Economic Vulnerability and Volatility

We also need to think about the underlying weaknesses in the US economy, fueled by its large current account deficit. Latest figures from the fourth quarter of 2025 show that the deficit remains substantial, making the US dollar reliant on steady capital inflows. A trade war that unsettles foreign investors could disrupt this inflow and lead to a sharp decline in the dollar. Some believe the European economy might be more vulnerable to escalating trade conflicts. Recent data from German manufacturing indicates some slowing down; if new tariffs are applied, the EU’s export-driven economy may suffer more than the US’s. This could unexpectedly strengthen the dollar against the euro in the short term. While the AI investment boom has supported the US economy during previous tensions, that momentum has diminished since its peak in 2024. Therefore, we cannot count on it for the same support this time. Hedging long dollar positions with out-of-the-money put options may be a smart move to protect against sudden drops in investor confidence. Create your live VT Markets account and start trading now.

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