As the dollar slides, currency traders are overlooking a bigger risk around Greenland

By Christine Idzelis

'Greenland is a much bigger problem for Europe and the euro in an extreme scenario of a meltdown in the E.U.-U.S. relationship,' according to Barclays analysts

The U.S. dollar was softening Tuesday, deepening its decline over the past 12 months.

The U.S. dollar was weakening Tuesday, after President Donald Trump's efforts to buy Greenland intensified with threats of tariffs on European countries seen stepping up against his push to exert control over the Danish territory.

But some analysts anticipate the geopolitical dispute may wind up being a bigger problem for the euro, even if the currency of the European trading bloc was up against the dollar on Tuesday. "Greenland is a much bigger problem for Europe and the euro in an extreme scenario of a meltdown in the E.U.-U.S. relationship," said currency analysts at Barclays in a note Tuesday.

Investors are monitoring tensions in the North Atlantic Treaty Organization amid fears that NATO - the defensive alliance between Europe and North America that's been in place for decades following World War II - risks collapsing under a worst-case scenario. Europe, which has sought to increase spending on military defenses amid worries over its eastern borders following Russia's invasion of Ukraine in 2022, has this month sent troops to Greenland and is now facing potential economic pressures via Trump's threat of tariffs.

If the relationship between the U.S. and Europe breaks down, the U.S. dollar will remain the world's reserve currency, "but with a lot more volatility," said Anthony Saglimbene, chief market strategist at Ameriprise Financial, in a phone interview Tuesday. "If trade gets tougher, I think it's going to hurt European companies more than it's going to hurt U.S. companies," with the euro likely weakening more than the greenback, he said.

European countries such as Germany, whose economy is driven by exports, risk suffering more than the U.S., according to Saglimbene. Germany is Europe's largest economy.

Meanwhile, the ICE US Dollar Index DXY, which is a measure of the greenback against other major currencies, was down 0.8% on Tuesday, according to FactSet data. That increased the index's decline over the past 12 months to almost 10%.

The U.S. stock and bond markets were also down sharply Tuesday.

"The knee-jerk reactions in the market are not always from the correct longer-term reactions," said Saglimbene, adding that his base case remains that the U.S. and Europe will find "some common ground" where the U.S. can operate in Greenland with its security needs met.

"The worst-case scenario could be a total breakdown in the relationship between the U.S. and NATO partners, to a degree that the U.S. - for all intents and purposes - removes itself from the alliance," said the Barclays analysts. "Greenland is a bigger problem for the euro, ultimately."

While the dollar may be vulnerable to escalation in the spat over Greenland via a ratcheting up of tariffs, the analysts expect the risks to stem from "still-low hedge ratios" rather than a "massive exodus" from U.S. assets.

"Should the Greenland situation spiral out of control, however, we would view this as potentially much more challenging for Europe than last year's Liberation Day," the Barclays analysts said, referring to the global tariffs rolled out by Trump in April.

"Given that Germany has already announced a fiscal effort and the budgetary constraints in most E.U. states, the bar for fiscal news to add to the euro's tailwinds appears quite high to us absent a coordinated move towards joint issuance for the creation of a common defense capability," they wrote.

Also, European investors' accumulation of U.S. assets over the past 15 years is not necessarily "the Achilles' heel of the dollar," in their view. "The reason for the large U.S. overweight of the past 15 years is fundamentally due to superior economic performance and asset returns," they wrote. "In so far as the U.S. continues to generate such returns, the bar for divestment is automatically raised, notwithstanding considerations of political expediency."

'America's largest lender'

The euro (EURUSD) ended Tuesday with a gain of 0.7% against the dollar, marking its largest percentage increase since Sept. 16, according to Dow Jones Market Data.

"We are not so sure the impact on the euro will be as negative as is commonly assumed," following Trump's aim to buy Greenland and his related trade threats against Europe, said George Saravelos, global head of currency research at Deutsche Bank, in a note emailed Sunday. He said that's partly because Europe owns not only Greenland but a lot of Treasurys, or U.S. government debt.

The yield on the 10-year Treasury note BX:TMUBMUSD10Yrose 6.4 basis points on Tuesday to 4.294%, sending its price level lower. That marked its highest yield since Aug. 21, based on 3 p.m. Eastern levels, according to Dow Jones Market Data.

Check out: Treasury market faces worst day in months after Trump threatens European allies with tariffs related to Greenland

Europe is "America's largest lender," with European countries owning $8 trillion of U.S. bonds and equities, "almost twice as much as the rest of the world combined," wrote Saravelos. "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."

The U.S. stock market fell sharply Tuesday, with the Dow Jones Industrial Average DJIA dropping 1.8%, the S&P 500 SPX sliding 2.1% and the technology-heavy Nasdaq Composite COMP slumping 2.4%,according to FactSet data. The iShares MSCI Eurozone ETF EZU, an exchange-traded fund that tracks an index of stocks in countries that use the euro as their official currency, was down 1.7% on Tuesday.

In a social-media post over the weekend, Trump had pointed to Greenland as a national-security concern and threatened tariffs against Denmark, Norway, Sweden, France, Germany, the U.K., the Netherlands and Finland beginning Feb. 1, countries that he said "journeyed" to Greenland for unknown purposes. "This is a very dangerous situation for the Safety, Security, and Survival of our Planet," he wrote, "These Countries, who are playing this very dangerous game, have put a level of risk in play that is not tenable or sustainable."

But shortly after midnight on Tuesday, Trump indicated on his Truth Social platform that he had "a very good telephone call with Mark Rutte, the Secretary General of NATO, concerning Greenland." Trump added: "I agreed to a meeting of the various parties in Davos, Switzerland."

Investors will be watching this week for developments around Greenland at the World Economic Forum's annual meeting in Davos, according to Saglimbene. He said Davos will be "a big focal point" as Trump may address the dispute over Greenland while related meetings may happen on the sidelines, keeping geopolitical tensions and international trade top of mind for investors.

-Christine Idzelis

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01-20-26 1727ET