Economic Uncertainty Looms as Trump’s Tariffs Threaten Euro Parity
The recent presidential election has sent shockwaves through the global economy, with economists predicting a potential return to parity between the euro and the US dollar by 2025. The US dollar index has surged to its highest level in a year, while the euro has plummeted, briefly dipping below $1.05.
Tariffs and Inflation: A Perfect Storm
President-elect Donald Trump’s proposed 10% universal tariff on all imports and 60% tariff on goods from China are expected to drive inflationary pressures in the US. This could lead the Federal Reserve to slow down interest rate cuts, causing the dollar to strengthen. Meanwhile, the European Central Bank may ease monetary policy further, weakening the euro.
Expert Insights
James Reilly, senior markets economist at Capital Economics, forecasts the euro will hit equality with the dollar by the end of 2025. “The euro has suffered more than most in the wake of Trump’s victory, and we doubt that will let up anytime soon,” he notes.
George Saravelos, global head of FX Research at Deutsche Bank, agrees that uncertainty is high, citing the scale and speed of policy shifts as key factors. He predicts that if Trump’s agenda is implemented in full force, the euro could drop to 0.95 cents or below.
Modeling the Future
Barclays’ economists model a scenario where the euro hits dollar parity with a 10% tariff on European products and subsequent retaliation. Goldman Sachs also sees this outcome as a possibility, revising its view that the dollar would gradually decline through the year.
Historical Context
The euro was last worth less than $1 in the fall of 2022, during a period of recession fears, the Russia-Ukraine war, and an energy crisis. Since then, the euro has comfortably traded above parity, despite recent declines.
Global Tensions
This week, the threat of escalating tensions with Russia weighed broadly on European assets, boosting demand for safe-haven assets like the Japanese yen and Swiss franc. Jane Foley, head of FX strategy at Rabobank, notes that sustained tensions surrounding the Russian/Ukraine war could accelerate the downside potential in EUR/USD and increase the chances of a break below parity.
As the global economy navigates these uncertain times, one thing is clear: the fate of the euro hangs in the balance.
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