The euro struggles near a two-year low, facing pressures from Trump’s trade policies, diverging monetary approaches, and geopolitical uncertainty. Analysts warn the single currency could reach parity with the dollar by early 2025.
Could the Euro Slip Below Parity Again?
On January 10, the euro dropped below 1.03, a level last seen in October 2022. Strong US employment data bolstered the dollar, strengthening expectations of tighter Federal Reserve policies. The euro is nearing parity, a critical psychological level, last breached in summer 2022 when it fell as low as $0.95 by September.
Back then, aggressive Federal Reserve rate hikes, the European Central Bank’s (ECB) slower response, and a natural gas crisis in Europe created a perfect storm.
The euro’s weakening since Trump’s election in November 2024 suggests more challenges ahead. Trump’s sweeping tariff plans, coupled with corporate tax cuts, are expected to reshape global trade dynamics.
Adding to the tension are Trump’s demands for higher European NATO spending and his scepticism of transatlantic commitments, creating new geopolitical uncertainty. Analysts point to three main factors pressuring the euro.
1. Trump’s Tariffs Threaten European Trade
Higher tariffs on European exports, particularly cars and pharmaceuticals, could erode the EU’s competitiveness in the US market.
In 2023, the EU exported €502.3 billion in goods to the US, making up 20% of its non-EU trade. Machinery, vehicles (€207.6bn), and chemicals (€137.4bn) were the key exports.
Tariffs could make these goods less attractive to US buyers, reducing demand for euros. The adjustment may be gradual but could exert lasting downward pressure.
Goldman Sachs analyst Kamakshya Trivedi noted, “FX markets often fail to fully price in tariff risks beforehand,” indicating further dollar gains once policies take effect.
2. Diverging Policies Between the Fed and ECB
Tariffs and US tax cuts could fuel inflation in the US while suppressing growth in Europe, leading to diverging monetary policies.
The Federal Reserve may keep rates higher for longer to combat inflation, while Europe’s weaker growth could push the ECB to ease monetary conditions.
Goldman Sachs estimates the euro could drop 3% under a baseline scenario and as much as 10% if tariffs and tax cuts are fully implemented. This divergence may drive capital from euro-denominated assets to the higher-yielding dollar.
3. Geopolitical Risks and Energy Concerns
Geopolitical uncertainty, including Trump’s calls for NATO members to increase spending to 5% of GDP, adds to the euro’s vulnerability.
Doubts about US support for Ukraine and potential energy crises similar to 2022 could further strain transatlantic relations.
In 2022, Europe’s reliance on costly US liquefied natural gas (LNG) during a natural gas shortage increased dollar demand. A repeat scenario could similarly weigh on the euro.
What’s Next for the Euro?
The euro faces simultaneous pressures from trade policies, monetary divergence, and geopolitical uncertainty, leaving it in a precarious position.
Markets await policy announcements from Trump’s administration and further central bank guidance, but the euro could test parity by mid-2025.
Whether the currency declines further depends on the extent of US policy changes and Europe’s ability to counteract their effects. For now, the euro’s outlook remains fragile, with substantial risks on the horizon.
