2025 has barely begun and the euro has already registered its first major collapse against the dollar. The eurozone reference fell to $1,022 at the exchange rate, its lowest level in more than two years. and this awakens again the ghost of parity. There are currently seven firms that see the euro at the same level as the dollar before June 2025. Three of them even see the eurozone currency trading below the reference in the United States, since a drop of 3 is missing. .5% to reach this level.
Although the crossing once again plays in favor of the euro at the start of the week, the exchange rate between both currencies still places the euro at its November 2022 lows, trading in the $1,033 area. And since September of last year, with the change over 1.11, the European currency weakens by more than 7.5%.
Donald Trump’s victory in the United States elections changed the outlook for the market that now discounts higher inflation due to the looming trade war with China and fiscal policies ultra-lax of the Republican winner. This also alters the monetary policy expected for 2025 by the United States Federal Reserve. Growth expectations in the eurozone and the next steps that the European Central Bank will have to take also influence.
As an example, the market is now pricing in between one and two interest rate cuts of 25 basis points for this year, according to OIS financial contracts (Overnight Indexed Swapsused as a hedge against changes in short-term interest rates and to project where the central bank references will be in the short and medium term). These same contracts projected an additional cut of 50 basis points by 2025 before the US elections on November 6. That is to say, the market erased 50 basis points in just two months and that shoots the dollar up to current levels.
As the market prices a more restrictive policy in the United States, the rest of the currencies suffer accordingly. This leads eight experts to assess the parity of the euro against the dollar in the first half of the year, according to Bloomberg. Wells Fargo or Rabobank are two examples of investment firms that see the euro at parity before July 2025. But as the year progresses more analytics firms turn bearish and they update their change expectations downwards until December.
For Goldhawk Partner and Commonwealth Bank of Australia it will even be lost, as they see a change of $0.98 in the second quarter of the year. However, Wells Fargo also anticipates that equity between both currencies may be lost in the second half of the current year. “Strategically, we maintain a bearish stance for the euro-dollaraiming for parity in the medium term,” commented Danske Bank analyst in Copenhagen, Mohamad Al-Saraf.
The foreign exchange market also includes forward contracts and future options. This type of asset reflects the probability of reaching parity between both currencies. After last week’s collapse of the euro, the lower limit of the deviation range for all maturities starting from one month, and up to 2028, is minimum exchange rate of less than one euro for one dollar. For the first half of 2025, the lower limit of the euro is 98.7 cents, while by the end of the year it would fall to 95.7 cents. That is, the probability of trading below parity is close to 30%according to these financial assets.
“The challenges facing the euro are due to a strong dollar, supported by resilient growth in the United States and elevated Treasury yields.[de EEUU]”commented the expert from Bloomberg IntelligenceNour Al Ali. On the other hand, hedge funds are redoubling their bets in favor of this parity with the euro at the lows of November 2022. Last Thursday, when the crossing of $1,022 was reached, nearly 2.5 billion euros were traded in options that took parity for granted.
This is also because the market continues to assume that the ECB will maintain its monetary flexibility, which will widen the difference at the end of 2025 between the reference in the United States and the price of money in the euro zone. “The balance of risks is biased to the downside for the euro, especially around 1.03 levels. Growth in the eurozone is slowing, adding to expectations that the ECB may have to cut further or deeper to support growth,” says Cristobal Wong of Obersea-Chinese Banking.
The last time the euro lost parity was at the end of 2022. After the Russian invasion of Ukraine, an energy crisis was unleashed in Europe that triggered the risk of a slowdown in the eurozone. At that time, the euro fell to $0.959.
‘Coal’ for the euro
On Three Kings Day, Ecotrader technical analyst Joan Cabrero also updated the euro strategy against the dollar for the investor portal theEconomist.is. From a technical point of view, the recent release of support from the 1.035-1.04 dollars is a bad sign for the eurozone currency. The reference thus enters the base of the channel that limits the consolidation of recent months and “gives clues that point towards a potentially bearish context in search of the 2022 minimums around $0.95 per euro,” commented Cabrero.
“The Three Wise Men bring carbon to our currency, but this is something that reinforces the maintenance of actions on the other side of the Atlantic in dollars,” commented the Ecotrader expert. And, thanks to the currency effect, the Ibex 35 rises 0.47% in the year while in dollars it exceeds 0.7%.
On the other hand, the euro is not the only currency that gives in to the almighty greenback. The basket of the ten major market currencies also sinks against the dollar, which is trading on average at November 2022 highs against the euro, pound sterling, Japanese yen or Chinese yuan, among others. However, the currencies that have suffered the most in recent months are the currencies of emerging countries. The Brazilian real or the Mexican peso are some examples of this with falls of 11.4% and 6.4%, respectively, in the last three months.
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