Just a month ago, history seemed written. After a huge revaluation of the dollar against the euro, the moment of weakness of the North American currency has arrived and the drums of return are resounding on the old continent. However, far from being the case, since its October highs, the European currency has already fallen 5% against its pair and reached its lowest levels of the year on Tuesday. A bearish run that occurred in record time and this has led to one euro now being exchanged for 1.0612 dollars.
Although Trump won the election last week, the initial shock to the currency market has not worn off and there have already been six straight sessions of sharp declines. Of the last nine sessions, only one negotiated positively and he did so with a residual lead of 0.1%. The new declines triggered a tension that seemed contained and, now, analysts are talking openly about the possibility of a return to parity. Although others resist this theory, the truth is that the currency market is entering a new era where, even for the most skeptical, this “surprise” is already entering the scene as something possible.
This feeling that parity is possible is already starting to develop in the major analyst consensus forecasts. At least 10 major banks such as Barclays, Deutsche or Nomura which appear in this group have reduced their forecasts for the European currency. One of the most notable is that of Pictet Wealth, which anticipates a drop of 6%. Mizuho, for his part, believes that In 2025, both currencies will practically reach this milestonewith 1.01 dollars for one euro. However, the general consensus, where several values have not yet been updated since the election, points to $1.09, and lower than the 1.13 it was before the election.
One of the first to realize this scenario was the team of analysts at ING, led by Chris Turner, who in his latest report explains that he is completely changing his outlook for the coming months. “We assume that Trump will continue his fiscal and protectionist measures, which translates into a range of $1 to $1.05 per euro.” In other words, according to its basic estimate, parity could occur in 2025.
Companies like Goldman Sachs go further and claim that if the promised tariffs are implemented, the euro will fall “below” the dollar. JP Morgan published a report on Tuesday claiming that “the Euro-dollar could trade” below $1.05 and move toward parity assuming an absolute majority of Republicans in the Senate are confirmed. »
“The Republican landslide victory and the prospect of further fiscal stimulus have once again driven up Fed interest rates.” they defend against ING. The interest rate swap market Today we are talking about only 50 basis points by June, whereas just a month ago the question was whether this amount would be reduced by 100 points or by 125 in total. Even if next December the probability of a cut of 25 basis points seems total, the markets now estimate that calm will take over the central bank while waiting to know the effect that “hurricane Trump” could have on inflation.
At the same time as American rates would be reinforced by inflation More bitter because of tariffs and other measures, their blow to Europe “makes a 50 point cut from the ECB for December this year more likely and we expect the final rate to be 1.75 % by the end of 2025. In summary, even if the Fed does not reduce its spending, the ECB will have to do so more quickly if it wants to keep the region’s economies on their feet, particularly Germany, which is very exposed to American sales through its industry and which is already in recession.
Claudio Wewel, monetary strategist at J. Safra Sarasin Sustainable AM, comments in statements to elEconomista.es that, whatever happens, “the political agenda planned by Trump expected to boost US growth in the near termwhich implies that the room for rate cuts will be limited in the United States. This should support the dollar. » Therefore, although they expect a slight improvement in the backdrop for the euro, “we think it is very unlikely that the strength of the dollar will decline from now on”.
ING believes that the critical moment when Parity can occur at the end of 2025. From the last quarter to the first of 2026, there will be a “moment of maximum pressure for Europe.” The reason for choosing these dates is that, based on what happened in 2018 (with US tariffs on Europe), Trump “is expected to take about a year to present trade investigations to the WTO or conduct internal investigations with the U.S. Trade Representative.” “.
“The situation today is very different from that of 2017 (when the dollar was falling against the euro), now the outlook for the eurozone economy is bleak”
Additionally, Capital Economics points out that Europe’s economic fragility is conspiring against its currency, adding even more pressure and they estimate that the euro could reach parity by the end of 2025.The situation is now very different from that of 2017 (when the dollar fell against the euro)”, now “the outlook for the eurozone economy is bleak and a bigger trade war could be imminent.”
The latest known data clearly showed that The European economy will not rebound as expected. Deutsche Bank published in its report last week that it expects growth of only 0.7% in 2024 and 1% in 2025, which is lower than its expectations. Vanguard and S&P 500 are at 0.8%. According to the IMF itself, growth for Europe has been reduced by a tenth to 0.8% and by three tenths for 2025 to 1.2%.
The main reason for this slowdown while the United States grows by 2.8% It is accompanied by stagnation in industry (notably in Germany and, to a lesser extent, in France). In the case of the “locomotive of Europe”, falling demand, rising costs and competition are hampering its activity. This leads the Bundesbank to forecast a drop in its GDP of 0.2% for 2024 after a further contraction of 0.3% in 2023. However, the situation of the secondary sector is uncertain throughout Europe with the manufacturing PMI index at 46 points (50 points). the growth threshold).
Furthermore, this situation occurs in a very complicated context, given that the region is particularly likely to suffer from the rise of Trump. The reason, according to XTB, is “marked export character many of his savings. » The case of Germany stands out, for which the United States represents 10% of all its foreign sales. The company recalls the case of the trade war with China where American customs tariffs (of 25% on all its products) “caused a drop of 10%.”
According to their forecasts, the 10% customs duties proposed by the United States could subtract between 0.5% and 1.5% of the continent’s GDP, those of Goldman Sachs targets 0.5% base cut. Given this situation, the firm estimates that it will reach $1.05 per euro as support. If the president keeps his promises on tariffs, taxes and migration, “we believe that parity could be achieved in 2025”.
Parity will not be so easy
From Commerzbank, they are less pessimistic and believe that the euro will reach a low of $1.05. “It is possible that the dollar will continue to appreciate in the coming weeks and months, once the consequences of Trump’s election victory are fully realized. However, the potential is limited.” The German bank explains that although tariffs and tax cuts will favor the dollar, “a lot of the current increases are due to the prospects of what Trump will do.” In short, markets are already anticipating Trump’s measures given current movements.
In this sense, they estimate that in the medium term it will not be viable for the dollar to keep pace for a number of reasons. First, although Trumpnomics will be positive for the dollar if it is followed, many conditions must be met for this to happen. First of all, that everything that is promised comes true, “it is very likely that not everything will come true.”
“There are really few signs to expect extreme dollar strength, although specific episodes could be seen with the euro even below parity.”
From Safra Sarasin they agree that there is some relief for the euro. “We think it is very unlikely that Trump administration imposes tariffs (on Europe) from the start and that this threat will be more of a bargaining chip in the negotiations. » In this sense, they emphasize that Europe, unlike other regions, “should be less worried than other regions, because it can take credible retaliation with these taxes. “Something which gives more place to the euro than some people would suggest.
In addition, the Fed must align with Trump and manage to avoid inflation, or even achieve it by not having sufficiently restrictive rates. »This inflation will cause the dollar to end up depreciating“. In summary, the German bank states that “there are really few signs to expect extreme dollar strength and, although specific episodes could be observed with the euro even below parity , the outlook is that these levels are not sustainable.”
For their part, analysts like those of Julius Baer even speak of a rebound towards 1.08 dollars per euro. This is mainly explained by the fact that “in the long term, the increase in imminent deficits will be decisive” for the future of exchanges between currencies. Regardless, they now expect a period of calm after the recent increases given that “election uncertainty is already out of market sentiment and now everything will depend on the data and the Fed until for Trump to take command with his inauguration on January 20.” .
