Euro Weakens Against Dollar and Yen as Geopolitical Tensions and Manufacturing Data Weigh
Single currency faces pressure from Latin American crisis and disappointing PMI figures from Spain, Italy and Germany
The euro weakened this week against most major currencies, including the US dollar and the Japanese yen, as investors rotated toward traditional safe havens amid a sharp escalation in geopolitical tensions in Latin America. Market sentiment deteriorated following the large-scale US military operation in Venezuela and the detention of President Nicolás Maduro, raising fresh uncertainty over energy supply and regional political stability. The unexpected developments added to broader risk-off flows that have characterised the start of 2026.
The single currency also continued to face pressure from disappointing macro signals within the euro area. On Friday, HCOB Manufacturing PMI data from Spain, Italy and Germany fell more than expected, slipping into contraction territory and delivering a sobering assessment of the eurozone’s industrial health. The HCOB Eurozone Manufacturing PMI fell to 48.8 in December from 49.6 in November, marking the lowest reading in nine months and the second consecutive month below the critical 50-level that separates expansion from contraction.
Germany recorded the steepest deterioration in sector conditions since February 2024, posting the weakest performance among the eight monitored eurozone nations. The German manufacturing sector’s struggles reflect broader structural challenges facing Europe’s largest economy, including elevated energy costs, weak demand from China, and persistent supply chain pressures. Italy and Spain also slipped back into contraction territory after brief stabilisation periods, underscoring the broad-based nature of the industrial slowdown.
Production volumes across the eurozone declined in December for the first time since February, ending a nine-month sequence of growth. New orders fell at the quickest pace in almost a year, with export demand decreasing at the fastest rate in 11 months. The data painted a concerning picture of manufacturers unable or unwilling to build momentum heading into 2026, instead exercising caution that economists warn could prove “poison for the economy.”
If this weakness persists and spreads to other core economies, it could challenge the European Central Bank’s recent stance of keeping interest rates unchanged at 2%. The ECB has held rates steady since its last cut in December, citing confidence that inflation is returning sustainably to target while maintaining flexibility to respond to evolving economic conditions. However, deeper manufacturing contraction combined with softening services activity could force policymakers to adopt a more dovish tone and potentially resume rate cuts sooner than currently anticipated by markets.
The currency market moves reflect a classic flight to quality, with the Japanese yen benefiting from its traditional safe-haven status despite the Bank of Japan’s ongoing monetary tightening. Rising tensions between Russia and Ukraine have also weighed on euro sentiment, as the eurozone remains heavily dependent on energy imports and vulnerable to supply disruptions. The escalation in Latin America following the Venezuela operation has added another layer of geopolitical uncertainty that supports defensive positioning in currency markets.
Looking ahead, this week’s dense economic calendar will be crucial for shaping expectations around ECB policy and the euro’s trajectory. Inflation data from France and Germany are due on Tuesday, followed by euro area and Italian inflation figures on Wednesday. These releases will provide critical insights into whether the manufacturing sector’s weakness is feeding through to broader price pressures, or whether services inflation remains sticky enough to constrain ECB policy flexibility.
Thursday brings euro zone economic sentiment and unemployment data, offering additional perspective on confidence levels across the bloc. Friday will feature German and French industrial production alongside retail sales figures for Italy and the euro area. Together, these releases will be closely monitored as they could inject significant volatility into forex and bond markets, particularly if they confirm fears of accelerating economic weakness.
The eurozone Services PMI, revised slightly lower to 52.4 in December, pointed to moderate momentum in the bloc’s dominant sector, while the Composite PMI was revised down to 51.5 from an initial estimate of 51.9. These figures suggest the services sector continues to expand, but at a decelerating pace that raises questions about its ability to offset manufacturing’s drag on overall growth.
Market participants are particularly focused on whether Germany’s recently announced €500 billion infrastructure programme and rising defence spending across Europe can breathe new life into the industrial sector. Manufacturers’ sentiment toward the year-ahead outlook improved in December, reaching the strongest level since February 2022—immediately before Russia’s invasion of Ukraine. This optimism suggests companies anticipate fiscal stimulus will eventually translate into stronger demand, though the timing and magnitude remain uncertain.
Input cost inflation intensified in December, with purchasing prices rising at the fastest rate in close to eighteen months. This was driven primarily by industrial metals such as copper and tin, which saw sharp increases, rather than energy costs, as oil and natural gas prices fell during the month. The combination of rising input costs and weak demand complicates the outlook for manufacturers already operating under pressure.
For the euro, much depends on whether the upcoming data releases support the narrative of temporary weakness giving way to recovery, or confirm fears of more entrenched industrial malaise. In the meantime, geopolitical developments in Latin America, Ukraine, and the Middle East will likely continue to support safe-haven currencies at the single currency’s expense. The market’s focus on this week’s inflation and sentiment data reflects recognition that the ECB’s policy stance—and by extension, the euro’s valuation—may hinge on these readings.
With the dollar index consolidating near recent highs and the yen maintaining strength despite the Bank of Japan’s cautious approach to normalisation, the euro faces headwinds from multiple directions. Only a substantial positive surprise in economic data or a de-escalation of geopolitical tensions appears likely to shift momentum in favour of the single currency in the near term.
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