The prospect of the U.S. introducing a swathe of new tariffs under President-elect Donald Trump has led economists to say the euro could return to parity with the U.S. dollar in their 2025 outlooks.
Since Trump’s decisive victory in the Nov. 5 election, which also handed the Republican party control of both houses of Congress, the U.S. dollar index — which measures the greenback against a basket of currencies — has soared to its highest level in a year.
The euro has declined rapidly, meanwhile, briefly dipping below $1.05 on Nov. 14 for the first time since October 2023. Just two months ago, it was trading around $1.17.
A proposed 10% universal tariff on all imports and a 60% tariff on goods from China — along with Trump’s plans to cut taxes and curtail immigration — are broadly expected to drive inflationary pressures in the U.S.
That would cause the Federal Reserve to cut interest rates at a slower pace than expected, and to exercise more caution in the short-term. Higher interest rates generally support a currency.
“The euro has suffered more than most in the wake of Trump’s victory and we doubt that will let up anytime soon,” James Reilly, Capital Economics’ senior markets economist, said in a note last week, forecasting the euro will hit equality with the dollar by the end of 2025.
Just as the Federal Reserve may proceed with rate cuts more slowly and boost the dollar, the European Central Bank may now ease monetary policy even more than it otherwise would have amid the “economic blow of slowing exports,” Reilly observed.
A number of uncertainties remain, the economist added — including whether the tariffs can be legally implemented, whether they would simply be a negotiation tool or semi-permanent, and whether certain countries or goods will be exempted.
10% tariffs
George Saravelos, global head of FX Research at Deutsche Bank, also said uncertainty was high and the key factors would be the “scale and speed of policy shifts.”
“If the Trump agenda is implemented in full force and quickly without a countervailing policy response from Europe or China, we could see [euro-U.S. dollar] drop through parity to 0.95 cents or even below,” Saravelos said in a note, adding that this overshoot would take the trade-weighted dollar to a record high.
A “more balanced approach” by Trump — still seeing a 10% universal tariff with a 2-year implementation period, but with a lower 30% rate on China and less extreme policies on deregulation and immigration — would see the euro hitting $1, Saravelos said, matching the dollar’s historic record high but not exceeding it.
Modeling by Barclays‘ economists shows the euro hitting dollar parity with a 10% tariff on European products and subsequent retaliation.
The same outcome was cited as a possibility in Goldman Sachs’ 2025 FX outlook. The bank said the prospect of Trump tariffs and fiscal reforms had caused it to revise its view that the dollar would gradually decline through the year, instead seeing the U.S. currency “stronger for longer.”
At the same time, it revised its euro forecasts lower, stating that its economists “no longer see an economic outlook that is conducive to a gradual Euro recovery” — with factors including the European Union’s vulnerability to global trade uncertainty, and the ECB continuing to cut rates while the Fed takes its foot off the gas.
However, Goldman also said the euro could surprise to the upside if trade policy ends up being “more benign,” or real rates in the euro area — which are adjusted for inflation — stay higher than expected.
Russia tensions mount
The euro was last worth less than $1 in the fall of 2022, when recession fears, the outbreak of the Russia-Ukraine war and an energy crisis weighed on the European outlook. The greenback was meanwhile boosted by rapid Federal Reserve rate hikes and a broader market move into so-called safe-haven assets.
Before that, the euro had traded above the dollar for two decades. Since hitting a low in September 2022, the euro has been comfortably back above parity even if below its long-range average.
One of those 2022 factors roared back into focus this week, weighing broadly on European assets: the threat of escalating tensions with Russia.
Global markets were rocked after Russian President Vladimir Putin on Tuesday said the country had expanded the circumstances under which it will consider nuclear retaliation. It came as the Kremlin accused Ukraine of firing controversial U.S.-made long-range missiles into its territory, following approval by U.S. President Joe Biden.
A surge in demand for safe-haven assets boosted the Japanese yen and Swiss franc, while also supporting the U.S. dollar, Jane Foley, head of FX strategy at Rabobank, told CNBC.
“If sustained, the spike in tensions surrounding the Russian/Ukraine war has the potential to accelerate the downside potential in EUR/USD and increase the chances of a break below parity,” Foley said.
— CNBC’s Ganesh Rao contributed to this story
