Donald Trump’s victory in the US elections sent the market like a hurricane. Not only are stock markets adapting to new expectations linked to the electoral promises of the new president: other assets, such as fixed income securities or currencies, are also affected and, in the case of the euro/dollar, the The impact can be enormous in the months to come. The euro’s first reaction was intense: lThe European currency lost 1.6% against the US dollar, its highest value, and this drop is the sharpest observed since the worst moments of the pandemic.. The euro is now trading at $1.07 and many analysts are warning of the danger of a return to parity (one dollar for one euro) in the months to come.
The collapse suffered by the euro against the dollar on the first day since Donald Trump’s victory was known is the strongest since 2020, in the worst and most complicated moments for the markets of the pandemic. This is the fourth worst session in almost 9 years for the European currency, an example of the impact that the victory of the Republican candidate in the elections had.
The movement of the currency is linked to the impact of the election outcome on the monetary policy of the Federal Reserve and the European Central Bank. Trump won with an economic program that will generate more inflation, according to a broad consensus of economists. Almost everyone warns that if the new president keeps his promise to impose tariffs and decides to take tough measures against immigration, it will generate more inflation. AND If this happens, the Federal Reserve will not be able to lower interest rates as much as the market expected.
Indeed, long-term inflation expectations skyrocketed in the United States this Wednesday, and already reached 2.6%. This assumes that the market expects this inflation rate to continue in five years, which will move the Fed’s target away from 2% and force the US central bank to maintain rates higher than those currently set. she had fixed. However, the movement has not taken place in Eurozone inflation expectations and, therefore, everything indicates that the ECB will be able to continue the path of lowering rates that it began this year.
In this context, investors began to buy dollars, anticipating that interest rates will be higher in the United States than in the Eurozone. It must be remembered that the rate differential is a favorable element for the country’s currency which keeps them at a higher level, since the currency, in international markets, always seeks the asset that remunerates the most for the same risk. So, with greater interest in US bonds, expectations for the dollar increase (when an investor buys a dollar-denominated bond with another currency, it directly affects the exchange rate).
Analysts warn of possibility of parity
Once Trump’s landslide victory became known, many analysts began warning of the possibility that the euro’s exchange with the US dollar would soon return to parity. At ING, Chris Turner, global head of markets, explains how the election result “is negative for the euro/dollar, since the rate differential is widening against the euro and there is a new premium of risk to be taken into account due to Protectionist policies, but also due to the potential increase in geopolitical risk, are the immediate objective for the coming weeks. “The transition to parity will wait until 2025, when the full potential of Trump’s protectionist policies will be evident.”warns.
In the same sense, “euro/dollar parity is a real possibility, if Trump implements his tariff plan,” explained Michael Hart, senior strategist at Pictet Wealth Management, in early October. Nour Al Ali, macro and markets strategist at Bloomberg, also highlights how “the expectation of an aggressive rate cut process by the ECB, as well as other headwinds, increases the risk that the euro will once again encounter the parity in 2025, a scenario that the markets increasingly seem to be integrating,” he insists.
For his part, George Saravelos, head of currency analysis at Deutsche Bank, believes that the danger of a trade war with China as the protagonist will force the ECB to reduce interest rates more aggressively than what investors are currently anticipating the markets. leads us to emphasize that “This will bring rate differentials to historic extremes and the euro-dollar rate will fall to around parity”he emphasizes.
