The United States under President-elect Donald Trump is likely to introduce a raft of new tariffs, and economists say the euro could regain parity with the dollar in their 2025 outlook.
Since Trump’s decisive victory in the November 5 election, which gave Republicans control of both houses of Congress, dollar index – a measure of the dollar’s exchange rate against a basket of currencies – has surged to its highest level in a year.
Meanwhile, the euro fell rapidly, briefly falling below $1.05 on November 14 for the first time since October 2023.
one A general tariff of 10% is proposed All imports A 60% tariff on goods from China, coupled with Trump’s plan to cut taxes and restrict immigration, is widely expected to Pushing up U.S. inflationary pressures
This will lead to the Fed cutting interest rates slower than expected and being more cautious in the short term. Higher interest rates generally support currencies.
“The euro has been hit harder than most by Trump’s victory, and we doubt this will be the case,” James Reilly, senior market economist at Capital Economics, said in a note last week. The situation will ease quickly.
Reilly observed that just as the Fed is likely to cut interest rates more slowly and boost the dollar, the ECB may now ease monetary policy further amid the “economic hit of slowing exports.”
The economist added that there are still many uncertainties, including whether the tariffs can be legally implemented, whether they are just a negotiating tool or semi-permanent, and whether certain countries or goods will be exempted.
10% tariff
George Saravelos, global head of foreign exchange research at Deutsche Bank, also said that uncertainty is high and the key factor will be “the scale and speed of policy changes.”
“If the Trump agenda is fully and quickly implemented without countervailing policy responses from Europe or China, we could see parity (EUR/USD) fall to 0.95 cents or even lower,” Saravelos said in a note. .
Saravelos said that Trump’s “more balanced approach” still implements a 10% general tariff for a two-year implementation period, but reduces the tariff on China to 30%, and the deregulation and immigration policies are no longer That extreme would put EURUSD at $1, matching but not exceeding the greenback’s all-time record high.
Barclays Bank Modeling‘ Economists say the euro will hit dollar parity with the imposition of 10% tariffs on European products and subsequent retaliatory actions.
The same outcome was mentioned in Goldman Sachs’ 2025 FX Outlook. The bank said the prospect of Trump’s tariffs and fiscal reform has led it to change its view that the dollar will gradually weaken this year and instead believes that the dollar “will strengthen over the longer term.”
At the same time, it cut its euro forecast, saying its economists “no longer believe the economic outlook is favorable for a gradual recovery of the euro” – for reasons including the EU’s vulnerability to global trade uncertainty and the European Central Bank’s continued easing of caution as the Federal Reserve At the same time, interest rates were cut.
However, Goldman Sachs also said that if trade policy ends up being “more dovish” or if real interest rates in the euro zone (adjusted for inflation) remain higher than expected, the euro may unexpectedly rise.
Tensions rise in Russia
The last time the euro fell below $1 was in the fall of 2022, when recession fears, the outbreak of the Russia-Ukraine war and the energy crisis weighed on Europe’s outlook. Meanwhile, rapid interest rate hikes by the Federal Reserve and a broader market shift into so-called safe-haven assets have boosted the dollar.
Prior to this, the euro-dollar exchange rate had been stable for two decades. Since hitting its lows in September 2022, the euro has easily returned to parity, even if it is below its long-term average.
One factor in 2022 is back in focus this week, putting widespread pressure on European assets: the threat of escalating tensions with Russia.
Global markets shake Russian President Vladimir Putin said on Tuesday that the country had expanded the scope of its consideration of nuclear retaliation. it is as Kremlin accuses Ukraine of launching controversial US-made long-range missiles The entry into its territory was approved by US President Joe Biden.
Jane Foley, head of foreign exchange strategy at Rabobank, told CNBC that the surge in demand for safe-haven assets has boosted the yen and Swiss franc, while also supporting the dollar.
“If sustained, heightened tensions surrounding the Russia/Ukraine war could accelerate EUR/USD’s downside potential and increase the likelihood of a move below parity,” Foley said.
—CNBC’s Ganesh Rao contributed to this article
