The euro could drop to parity with the US dollar for the first time since late 2022 if a potential transatlantic trade war exacerbates the eurozone’s economic challenges, analysts have cautioned.
On Friday, the euro fell below $1.04 against the dollar—the weakest level since November 2022—after a survey revealed a decline in eurozone private sector output this month. Concerns over new US tariffs on European imports have also weighed on the currency. Having been valued at $1.09 on November 5, the euro has declined for three consecutive weeks, ending last week at $1.041. Analysts fear it may fall further as Donald Trump’s administration unveils its economic policies.
Trump has proposed imposing a 60%-100% tariff on Chinese goods and a 10%-20% levy on imports from other countries, which could make European exports to the US less competitive and harm economic growth.
Deutsche Bank analyst George Saravelos estimates that markets have only partially accounted for the potential impact of Trump’s proposed tariffs, immigration restrictions, and increased fiscal spending. He believes a sell-off could intensify if these measures are enacted. “The market is still not pricing a lot of Trump,” Saravelos remarked, adding that a euro-dollar parity level would reflect only about half the intensity of Trump’s policies, with the possibility of further declines.
The bleak PMI survey from last Friday showed eurozone business activity contracting in November, fueling speculation about substantial interest rate cuts by the European Central Bank (ECB) next month. Investors are now pricing in a 50% chance of a 50-basis-point rate cut, with a 25-basis-point reduction fully anticipated. The ECB’s current deposit rate stands at 3.25%, following a recent cut.
Meanwhile, major eurozone economies are under scrutiny. Germany, the bloc’s largest economy, is preparing for a general election amidst stagnation, while France is bracing for a growth slowdown. The composite eurozone PMI fell to 48.1, driven by an unexpected dip in the services sector to 49.2, increasing the likelihood of steep rate cuts.
Kyle Chapman, a foreign exchange analyst at Ballinger Group, noted, “The euro decisively broke below $1.04, a threshold not seen since the energy crisis of late 2022. Parity is now within reach.”
However, the appointment of Scott Bessent as the US Treasury Secretary might provide temporary relief for the euro. Bessent, a hedge fund billionaire, has expressed a preference for gradual implementation of tariffs. His nomination is expected to be well-received by markets, according to IG analyst Tony Sycamore. Bessent has also suggested that falling inflation could lead to lower US interest rates and a weaker dollar.
Despite this, analysts caution that new US tariffs could be inflationary, prompting the Federal Reserve to maintain higher interest rates to combat inflation, while the ECB may sharply cut borrowing costs to stave off a eurozone recession. ABN Amro analysts predict that Trump’s return to the presidency could lead to significant US tariff increases, primarily targeting China but also affecting Europe, likely driving the euro-dollar exchange rate to parity by 2025.
