The rift between the European Union and the United States is deepening. Washington’s withdrawal from the Ukraine conflict is becoming increasingly apparent—while Brussels continues to confront. Financial markets are already moving in different directions. Now the ECB has warned of an impending dollar shortage.

Trade wars are not merely disputes over tariffs and the flow of goods. At their core, they are battles for power in the currency markets—arenas where geopolitical conflicts are fought without bloodshed, yet often with devastating economic consequences for the losers.

The most striking example today: the deliberate devaluation of the Chinese yuan. Beneath this maneuver lies more than just monetary policy. It functions as a pressure valve for domestic tensions, capital misallocations (such as the collapse of the real estate sector), and labor market strain.

Artificially cheapened exports shift some of this burden abroad. Simultaneously, the Communist Party consolidates domestic power. The systematic devaluation of the yuan slows the rise of a middle class with purchasing power—thus stifling demands for political participation. That’s the wind blowing through China.

The Plaza Accord as Blueprint

A look at the trade conflict unleashed by U.S. President Donald Trump and the imposition of temporary tariffs reveals: behind the political theater, a realignment of global currency markets is underway—akin to the Plaza Accord of 1985, when the G5 states corrected the overvaluation of the dollar to rebalance trade flows.

The U.S. is no longer willing to tolerate the structural overvaluation of its currency—a consequence of its role as the world’s reserve currency. Trump made it clear: the days of bleeding out American industry in favor of foreign production sites are over.

Trump’s tariff offensive targets not just China. A reordering of trade flows via currency mechanisms between the two superpowers seems inevitable, as the damage from further escalation would be too great. But Trump’s real focus lies on the European Union—as he has repeatedly and unmistakably stated. “We have a deficit of $350 billion [with the EU]. They don’t buy our cars, nor our agricultural products,” Trump said of transatlantic trade.

These relations increasingly suffer under hidden trade barriers, harmonization mandates, and Europe’s norm-protectionism. Trump has called the EU a “tough nut to crack” in establishing fair trade relations. Notably, 75 percent of EU member states’ customs revenues flow directly into the European Commission’s budget under Ursula von der Leyen.

Carefully concealed under slogans like the “Green New Deal” or the mobility transition, the EU runs a subsidy engine rivaling China’s interventionist model. The protectionism vigorously defended by European actors falls squarely into this category.

Over time, the EU has developed an incentive structure fiercely shielded from external competition. When Trump refers to a “tough nut,” he means this corporatist complex—the alliance of powerful industrial interests, centralized governance from Brussels, and the defense of the single market via a wall of non-tariff barriers.

Dollar Shortage as Power Lever

Behind Europe’s protective wall, the situation is shifting. After years of Brexit paralysis, Brussels and London are now searching for ways out of their trade deadlock. The U.S.’s 90-day tariff moratorium has jolted both parties into action—the practical result being a partial reversal of Brexit.

Together, they are preparing for a protracted negotiation marathon with Washington, united in a front of protectionists. But Washington has already found a fitting lever to crack Fortress Europe: the Eurodollar market and the credit mechanisms outside the Federal Reserve’s jurisdiction.

With the end of the LIBOR contract—a former global benchmark for short-term interbank loans—on June 30, 2023, and the introduction of the U.S. alternative SOFR (Secured Overnight Financing Rate), the United States has fully seized control over dollar loan pricing. While LIBOR had been dominated by European banks and subject to interest-rate manipulation, SOFR is based on actual secured repo transactions in the U.S. market—largely immune to manipulation. Under this new structure, dollar credit becomes more expensive—bad news for Europeans long accustomed to cheap dollar financing.

The United States is deliberately freeing itself from the influence of European institutions that had previously defended their solvency through low interest rates and distorted global monetary conditions. With the loss of LIBOR, Europe has forfeited a key control instrument over its dollar financing and now faces the challenge of adapting to a strictly market-based regime.

Communications Failure or Naivete?

But as of Monday, it is clear: the United States is preparing to wield the dollar as an even sharper weapon. Apparently, the Trump administration—together with the Federal Reserve—has frozen existing dollar swap lines with the Eurozone. These swaps are liquidity arrangements between central banks in U.S. dollars.

Eurozone banks can no longer access emergency dollar liquidity when shortages arise. The ECB publicly called on Eurozone banks to audit their dollar reserves and identify possible shortfalls. Has the ECB inadvertently exposed the asymmetrical power structure between Europe and the United States? In a crisis, the ECB might be forced to go cap-in-hand to the Fed’s Discount Window for dollar loans.

Whether this resulted from a communications failure or a leak inside the ECB’s Frankfurt tower remains unclear. What is certain: officials from the European Central Bank publicly warned European commercial banks of a looming dollar shortage—a scenario with serious consequences. Roughly 17 to 20 percent of all loans in the euro area are denominated in U.S. dollars.

Much of the EU’s foreign trade depends on access to the reserve currency. If this tap runs dry, supply chains could rupture, and transatlantic trade may partially grind to a halt. One thing is clear: with this financial lever, Donald Trump and the United States wield a geopolitical weapon of considerable force.

A View of the Chessboard

Placed in a broader geopolitical context, it becomes clear: the U.S. is using its currency dominance more assertively, shifting the tectonics of global economic power. Geopolitical rivals within the BRICS bloc are striving to escape the dollar’s grip. But success is far from assured. Ironically, the alternative system envisioned by capitals like Beijing and Moscow hinges on the digital yuan—an instrument of absolute state control. Distrust among even China’s closest partners is palpable.

The yuan remains globally irrelevant as a transactional currency; only 2.2 percent of the world’s foreign exchange reserves are held in yuan. The U.S. dollar still dominates the global economy, with a 57 percent share of reserves. Efforts to bypass this dominance through a partially gold-backed settlement mechanism are nothing short of a monetary suicide mission.

Meanwhile, even America’s closest allies must reckon with an uncomfortable reality: dollar swap lines—privileged access to dollar liquidity—have become geopolitical bargaining chips in upcoming negotiations with the U.S. Brussels would do well to acknowledge this reality. The era of Euro-protectionism is drawing to a close—to the benefit of European consumers and the continent’s long-term economic resilience.

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Thomas Kolbe, born in 1978 in Neuss/ Germany, is a graduate economist. For over 25 years, he has worked as a journalist and media producer for clients from various industries and business associations. As a publicist, he focuses on economic processes and observes geopolitical events from the perspective of the capital markets. His publications follow a philosophy that focuses on the individual and their right to self-determination.