Donald Trump’s victory in the US elections has sent the market like a hurricane. Not only are the stock markets adjusting to the new expectations that are associated with the electoral promises of the new president: other assets, such as fixed income or currencies, are also being affected, and in the case of the euro/dollar, the impact can be huge. in the coming months. The initial reaction of the euro has been intense: lThe European currency loses 1.6% against the US dollar, its most important cross, and this decline is the strongest seen since the worst moments of the pandemic. Now the euro is trading at $1.07, and many analysts are warning of the danger of the exchange returning to parity (one dollar for one euro) in the coming months.
The collapse that the euro is suffering against the dollar on the first day since Donald Trump’s victory was known is the strongest since 2020, in the worst, most complicated moments for the markets of the pandemic. It 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 has had.
The movement of the currency has to do with the impact of the election result on the monetary policy of the Federal Reserve and the European Central Bank. Trump has won with an economic program that will generate more inflation, according to a broad consensus of economists. Virtually everyone warns that if the new president keeps his promise to impose tariffs, and also if he decides to take tough measures against immigration, this will generate more inflation. AND If this happens, the Federal Reserve will not be able to lower interest rates as much as the market was pricing in.
In fact, long-term inflation expectations have skyrocketed in the United States this Wednesday, and already reach 2.6%. This assumes that the market expects there will be this inflation rate in the five years starting five years from now, which moves the Fed’s target away from 2%, and forces the US central bank to maintain higher rates than it had. provided. However, the movement has not occurred in the inflation expectations of the euro zone and, therefore, everything indicates that the ECB will be able to continue with the path of lowering rates that it has started this year.
In this context, investors have started to buy dollars, anticipating that interest rates will be higher in the US than in the euro zone. It must be remembered that the rate differential is a favorable element for the country’s currency that keeps them higher, since money, in international markets, always looks for the asset that rewards the most for the same risk. Thus, with greater interest in US bonds, expectations about the dollar are increasing (when an investor buys a bond denominated in dollars with another currency, this affects the exchange rate directly).
Analysts warn of the possibility of parity
Once Trump’s overwhelming victory was known, many analysts began to warn of the possibility that the exchange of the euro with the US dollar would return to parity soon. From ING, Chris Turner, global director 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 risk premium that exists to take into account due to protectionist policies, and also due to potential increases in geopolitical risk. $1.05 is the immediate objective for the coming weeks, but. “The move toward 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 points out how “the expectation of an aggressive process of rate cuts by the ECB, together with other headwinds, increase the risk that the euro will once again encounter the parity in 2025, a scenario that markets seem to be increasingly discounting,” 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 cut interest rates more aggressively than what the investors are now discounting. markets, something that leads us to point out that “This will take rate differentials to historical extremes, and the euro-dollar crossing will fall to around parity”he highlights.
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