Dollar's Worst Start Since 1970s Could Dent European Corporate Profits

The US dollar has had the worst start of the year since 1973.

This steady decline comes as the Federal Reserve pivots toward rate cuts in response to slowing US economic activity and disinflationary trends. Meanwhile, the euro has gained over 13% against the greenback year-to-date, trading near $1.20, its strongest level in nearly four years.

This shift in currency dynamics is beginning to have real consequences for investors in European equities. Companies like SAP and ASML have issued warnings about challenging currency headwinds and geopolitical uncertainty.

A strong euro makes European goods more expensive abroad and hurts profit margins when converting US earnings back to euros. It also amplifies the impact of US-imposed tariffs.

Corporate treasurers now find themselves in a high-stakes environment where hedging strategies must be both nimble and cost-effective.

European Companies in US Are Exposed

While a weaker dollar can stimulate US exports and help emerging market economies, it creates a serious earnings headwind for European multinationals. Companies with a large share of revenue generated in North America are particularly exposed. The euro has advanced against the Canadian dollar, too.

A 10% appreciation in the euro could reduce STOXX 600’s aggregate earnings by around 2%, Citi analysts have estimated. Unfavorable currency conversion effects are responsible for the decline.

"European earnings forecasts are now broadly in line with 20% tariffs on European goods, the largest out of all major global equity regions, " Citi's Equity Strategist Beata Manthey said.

For companies that report in euros but operate heavily in dollar-denominated markets like the US, every cent the euro climbs effectively chips away at top-line growth. With the euro’s rise showing no immediate signs of reversal, equity investors need to reevaluate exposure to Europe’s most prominent international exporters.

Tariffs, Interest Rate Divergence Squeeze Competitiveness

The currency issue doesn't exist in isolation. It's converging with renewed protectionism and sharply diverging monetary policies to produce a perfect storm for European corporations.

While Donald Trump's latest deal with the EU avoided a full-blown trade war, these tariffs are eroding the pricing power of European companies. They are already struggling to maintain competitiveness.

Compounding the issue is the widening monetary policy gap between the European Central Bank (ECB) and the Federal Reserve. The ECB paused its rate cuts after a brief easing cycle, citing still-elevated core inflation and the risk of wage pressures across the eurozone.

"Although economy-wide growth and its leading driver, consumer demand, have both softened over the first half of 2025, they have remained stronger than expected amongst truly unprecedented levels of policy-related volatility and uncertainty," Brett House, Professor of Economics at the Columbia Business School, said.

Yet, the FED got under tremendous political pressure to cut the interest rate after last week's poor job report, with markets pricing in a 90.1% chance of a rate cut at September's meeting.

Europe’s Corporate Titans Begin to Feel the Pressure

Even Europe's most established and globally diversified firms are signaling caution. They have tempered forward guidance due to currency dynamics, and the broader equity picture warrants attention.

SAP SAP, the German enterprise software giant, recently reported second-quarter results with 9% revenue growth to €9.03 billion and EPS of €1.50, beating expectations. However, management specifically cited currency headwinds as a challenge.

The company said they "have been able to hedge at very good rates for free cash flow in 2025," and that those efforts are likely to stretch into 2026. North America accounts for over 40% of SAP's revenue base. Continued euro appreciation could pressure earnings momentum even in its cloud business.

ASML ASML, Europe's flagship chip equipment maker, echoed similar concerns. Although the company delivered a 23% year-over-year jump in sales to €7.7 billion and margins above 53%, it flagged currency volatility and geopolitical uncertainty as key risks.

With many of its semiconductor clients located in Asia and the US, ASML is highly sensitive to macro shifts, particularly when they hit both FX and supply chain costs.

Finnish telecommunications leader Nokia NOK issued a profit warning owing to currency headwinds and tariffs.

"Nokia is lowering its comparable operating profit outlook range to EUR 1.6 billion to EUR 2.1 billion (previously EUR 1.9 billion to EUR 2.4 billion)," the company said in a statement.

It warned that the guidance was based on the EUR/USD rate of 1.04. In contrast, the updated guidance reflects the rate of 1.17. CEO Justin Hotard estimated that every cent of change in the euro-dollar exchange has an impact of €10 to €15 million on the firm’s earnings.

Others at Risk From the Currency-fueled Margin Crunch

Outside of technology, several other large-cap European firms operate with similar FX exposure and face downside risk as the euro rises:

• argenx ARGNF specializes in antibody-based treatments for autoimmune diseases. With 84% of its sales coming from the US, a stronger euro puts downward pressure on revenues reported in Europe.
• Fresenius Medical Care FMS is a leading provider of dialysis services with extensive US operations. Roughly two-thirds of its revenue comes from the American market, and the firm also faces elevated labor and reimbursement cost pressures.
• Novo Nordisk NVO: A dominant player in the global insulin and obesity treatment markets. The company earns about 61% of its sales in the US, making it vulnerable to FX translation effects in its quarterly earnings.

These firms all belong to sectors that are heavily regulated and often have little pricing flexibility. Their ability to offset currency-related margin compression is limited, particularly in markets where healthcare reimbursement is fixed or politically sensitive.

Currency Gains Overshadow Modest Macro Improvements

The irony is that much of Europe's recent macroeconomic news has been positive.

Inflation has retreated from its 2022 highs, consumer confidence is stabilizing, and Q2 GDP numbers surprised to the upside. Strong industrial output in Germany and robust service sector growth in Spain and Italy have driven this trend.

Yet, analysts expect Q2 earnings for the STOXX 600 to decline about 3% year-over-year, with FX pressure cited as a key contributor. EPS downgrades have been widespread, particularly in export-intensive sectors such as pharmaceuticals, industrial automation, and luxury consumer goods.

As the euro approaches $1.22, more companies are at risk of missing their forward guidance, especially those with North American customer bases and minimal hedging in place. While banks and insurers may benefit modestly from stronger capital inflows, the broader corporate universe faces a less accommodating environment.

Disclaimer:

Any opinions expressed in this article are not to be considered investment advice and are solely those of the authors. European Capital Insights is not responsible for any financial decisions made based on the contents of this article. Readers may use this article for information and educational purposes only. 

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.