English Foreign currency is one of my favourite subjects. I spent years in Nordea’s foreign exchange (FX) department where our clients were some of the largest businesses in Northern Europe. However, sudden currency movements can wreak havoc not just to large companies’ pockets, but to expats and retirees as well.
If, like many of our readers, you’re an American expat living in Europe or planning to relocate here, you may have noticed recently that your US dollars don’t stretch as far as they recently did. With EUR/USD currently changing hands around 1.13 (that is, one euro costs you one dollar and thirteen cents) and potentially moving towards 1.20, understanding the reasons behind this currency shift and learning how to mitigate its impact is essential.
Why is the Dollar Weakening?
First of all, let’s look at where the US dollar is versus historical levels. The dollar has been strong against the euro for most of the past ten years, as the European economy has slowed down and faced (we’re talking 2012 – 2014, thankfully well in the past) a very dangerous debt crisis. For a decade, therefore, we’ve been getting used to euro and dollar trading close to 1:1. However, looking back to earlier times, the euro has had periods of great strength against the dollar, peaking in 2007 and 2008, when it took almost $1.50 to buy one euro.
Several recent political and economic factors have converged to weaken the US dollar. Ongoing tariff uncertainties and fears of an economic slowdown due to higher tariffs are major to the dollar’s weakness. Analysts at Nordea highlight that “Trump’s tariffs have boosted uncertainty to a totally new level,” driving increased volatility across global markets. Similarly, Bank of America points out in a recent note that the era of “US exceptionalism” – where global investors strongly preferred US assets – is giving way to “US repudiation,” with investors becoming cautious about holding American assets. We are not getting into the politics of it, which are not relevant to one main point: financial markets want certainty and stability. When they don’t get what they want, we get volatility and market tantrums.
Predicting short term currency movements is notoriously challenging. Anyone that tells you otherwise has a crystal ball and should be giving out lotto numbers instead. In the short term – we’re talking the second half of 2025, further volatility and dollar weakness appear likely. Ups-and-downs will be made worse by speculation, that is, the presence of traders who bet one way or another. They’re in for the profit inherent in wide moves, and this, while perhaps annoying, is an entirely normal behaviour.
The medium-term outlook, from 2026 onwards, remains uncertain, heavily dependent on future US economic policies, the evolution of global trade tensions, and the Federal Reserve’s interest rate decisions.
What Does Dollar Weakness Mean for Expats?
A weaker dollar directly impacts your buying power in Europe. Every 10% decrease in the USD/EUR exchange rate translates to a 10% drop in your purchasing power. With predictions suggesting the exchange rate could reach a historically typical level of 1.20, expats might soon face an additional 7–8% decrease in their spending power.
Practical Strategies for Protecting Yourself
While you can’t control currency fluctuations, you can manage their impact on your personal finances:
- Currency hedging: Providers like Revolut allow you to lock in current exchange rates for future use by the use of so-called “FX forwards”. While this comes at a fee, it provides certainty over short-term financial planning.
- Maintain a euro reserve: Exchanging some dollars now can be beneficial. By creating a cushion in euros, you avoid unfavourable exchange rates in the near future. Most of all, you avoid having to exchange your dollars for euro in a panic, and a potentially at a truly bad rate.
- Invest in euro-hedged assets: Hedging means, simply put, to remove a risk from a financial product. In this case, the risk you want to remove is the fact that you earn (weakening) dollars and spend (more expensive every day) euros. If your investment portfolio currently includes US Treasuries or S&P 500 funds, you can switch to euro-hedged versions. Funds such as IBTM (US Treasuries, EUR-hedged) help you maintain income streams while shielding your portfolio from dollar volatility. What this means in practical terms is that you “own” the same American companies or US Treasuries, but do not have to worry about where the dollar goes against the euro.
- Minimise exchange fees: While here we’re concerned by losing money on the exchange rate, something we can hardly control, we can control how much we pay when selling dollars to buy euros. Traditional banks typically charge high exchange fees, often around 5%. Alternatively, European fintech providers like Wise or Revolut offer significantly lower fees, approximately 0.5%. Wise, in particular, offers accounts without set-up or maintenance charges, making it a cost-effective choice. I have personally been a Wise customer since they launched in Europe more than 10 years ago, and while they don’t pay me for saying this, I am an enthusiastic fan of Wise.
Consider “Laddering” Your Currency Exchanges
Currency experts, supported by decades’ worth of research, often recommend exchanging smaller amounts at regular intervals, a practice known as laddering. This approach helps smooth out currency risk, maintaining flexibility and stability without overly exposing yourself to short-term market volatility. What this means in practice is that, if you have $100,000 in savings which you must progressively spend during your stay in Europe, you don’t exchange your dollars for euros all at once, nor do you wait until the last minute to buy euros. You might keep a euro buffer, say, 10% or 20% at all times, and make it a point to exchange a little bit every month to keep your euro reserves at that level. This way, methodically and unemotionally, you will automate your foreign currency transactions and avoid much of the volatility and potential panic.
Most importantly, avoid panic. Currency markets frequently experience turbulence, but volatility often stabilises over time. With thoughtful financial planning and the adoption of prudent currency management strategies, you can protect yourself from short-term disruptions.
Taking these practical steps will enable you to preserve your purchasing power and enjoy your life in Europe with greater confidence, irrespective of temporary currency fluctuations. And – one last thought. While short-term currency jitters can inflict pain, don’t forget that cost of living in Italy still remains comparatively very attractive versus the alternative in many other parts of the world.
Further Reads
- How to Handle Driving Tickets in Italy as a Foreigner
- Federico Faggin: From Microprocessor Pioneer to Consciousness Explorer in Vicenza
- Italy’s Land Consumption: How Development is Changing the Italian Countryside
- Internet Speed in Italy Is Getting Faster: What It Means for Where You Live
- Beyond Umbria: Le Marche Is the Smarter Choice for 7% Tax Towns
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