The euro last traded at $1 and below in 2022, but fresh developments have put parity back on the agenda.
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.
