Trump’s great impact on Europe is already here: the euro sinks to its lowest level of the year and parity seems real

Until a month ago the story seemed to be written. After a huge revaluation of the dollar against the euro, the moment of weakness of the North American currency arrived and the drums of comeback were sounding on the old continent. However, far from this happening, since its October highs the European currency has already sunk 5% against its pair and this Tuesday it has reached its lowest levels for the year. A bearish race that has occurred in record time and that has led to one euro now being exchanged for 1.0612 dollars.

Although Trump won the elections last week, the initial shock in the currency market has not dispersed and there have already been six consecutive sessions of clear falls. Of the last nine sessions, only one has traded positively and it has done so with a residual advance of 0.1%. The new falls have triggered the tension that seemed contained and, now, analysts openly talk about the possibility of a return to parity. Although others resist this theory, the truth is that the currency market is entering a new era where, even for the most skeptical, this ‘surprise’ is already entering the scene as something possible.

This feeling that parity is possible is already beginning to grow in the broad forecasts of the analyst consensus. At least 10 large banks such as Barclays, Deutsche or Nomura that appear in this group have reduced their forecasts for the European currency. One of the most striking is that of Pictet Wealth, which anticipates a drop of 6%. Mizuho, ​​for her part, believes that In 2025 both currencies will practically touch this milestonewith 1.01 dollars per euro. However, the general consensus, where several values ​​have not yet been updated since the elections, points to 1.09 dollars, and less than the 1.13 they were at before the elections.

One of the first to realize this scenario has been the team of ING analysts, led by Chris Turner, who in their latest report explain that they are completely altering their outlook for the coming months. “We assume that Trump will continue with taxes and protectionism, something that translates into a range of 1 and 1.05 dollars per euro.” That is, according to its base estimate, parity could occur in 2025.

Firms such as Goldman Sachs go further and affirm that, if the promised tariffs are carried out, the euro will fall “below” the dollar. JP Morgan published a report this Tuesday alleging that “the euro-dollar could be traded below $1.05 and move towards parity assuming that the absolute majority of Republicans in the Senate is confirmed.”

“The Republicans’ sweeping victory and the prospect of new fiscal stimulus have once again set the Fed’s interest rate higher.” they defend from ING. The interest rate swap market Now they are talking about just 50 basis points between now and June, while just a month ago the question was whether it would be cut by 100 points or 125 in total. Although this December the probability of a drop of 25 basis points seems complete, from then on the markets believe that calm will take over the central bank while waiting to know the effect that the ‘Trump hurricane’ may have on inflation .

At the same time as US rates would be reinforced by inflation more bitter due to tariffs and other measures, their blow against Europe “makes a 50-point cut by the ECB more likely for December of this year and we see the terminal rate at 1.75% by the end of 2025.” In summary, while the Fed does not cut, the ECB will have to do so at greater speed if it wants to keep the region’s economies on its feet, particularly Germany, which is very exposed to US sales by its industry and with this already in recession.

Claudio Wewel, currency strategist at J. Safra Sarasin Sustainable AM, comments in statements to elEconomista.es that, whatever happens, “the political agenda planned by Trump should stimulate US growth in the short termwhich implies that the room for further rate cuts will be limited in the United States. This should support the dollar.” Therefore, although they expect the context to improve slightly for the euro, “we believe that it is very unlikely that the strength of the dollar will diminish from now on.”

ING believes that the critical moment when Parity can occur at the end of 2025. From the last quarter to the first of 2026 there will be a “moment of maximum pressure for Europe.” The reason for choosing these dates is because, based on what happened in 2018 (with the US tariffs on Europe), Trump “should take approximately a year to present trade investigations at the WTO or conduct internal investigations at the US Trade Representative.” USA”.

“The situation now is very different than in 2017 (when the dollar fell against the euro), now the outlook for the eurozone economy is bleak”

Additionally, Capital Economics points out that Europe’s economic fragility conspires against its currency, adding more pressure and they see that the euro could reach parity at the end of 2025. “The situation now is very different than in 2017 (when the dollar fell against the euro)”, now “the outlook for the eurozone economy is bleak and a larger trade war could be around the corner.”

The latest data that has become known has made it clear that Europe’s economy will not rebound as expected. Deutsche Bank published in its report last week that they expect only 0.7% growth in 2024 and 1% in 2025, below their expectations. Vanguard and S&P 500 point to 0.8%. From the IMF itself, growth for Europe was reduced by one tenth to 0.8% and three tenths for 2025 to 1.2%.

The main reason for this slowdown while the US grows at a rate of 2.8% It comes hand in hand with the industry (particularly in Germany and, to a lesser extent, in France) stagnating. In the case of the ‘locomotive of Europe’, lower demand, higher costs and competition are hindering its activity. This has led the Bundesbank to project a fall in its GDP of 0.2% for 2024 after another contraction of 0.3% in 2023. However, the situation of the secondary sector is in doubt throughout Europe with the PMI index manufacturing at 46 points (50 marks the growth threshold).

Furthermore, this situation occurs in a very complicated context, given that the region may especially suffer from the rise of Trump. The reason, according to XTB, is “marked export character of many of its economies.” The case of Germany stands out, for which the US represents 10% of all its sales abroad. The firm recalls the case of the trade war with China where US tariffs (from 25% to all its products) “caused a 10% drop.”

According to their forecasts, the 10% tariffs proposed by the US can subtract between 0.5% and 1.5% of the continent’s GDP, those of Goldman Sachs targets 0.5% base hit. Given this situation, the firm estimates that it will reach $1.05 per euro as support. If the president fulfills his tariff, tax and migration promises, “we believe that parity could be achieved in 2025.”

Parity will not be so easy

From Commerzbank they are less pessimistic and believe that the euro will hit a floor of $1.05. “It is possible that the dollar will continue to appreciate in the coming weeks and months, once the consequences of Trump’s election victory have been fully realized. However, the potential is limited.” From the German bank they explain that although tariffs and tax cuts will favor the dollar, “a good part of the current increases are due to the prospects of what Trump will do.” In short, markets are already discounting Trump’s measures with current movements.

In that sense, they believe that in the medium term it will be unsustainable for the dollar to keep pace for a number of reasons. First of all, although “Trumpnomics” will be positive for the dollar if it is met, many requirements have to be met for this to happen. First of all, that everything promised is fulfilled “it is very likely that not everything will be fulfilled.”

“There are really few signs to expect extreme strength of the dollar and, although specific episodes could be seen with the euro even below parity”

From Safra Sarasin they agree that there is some relief for the euro. “We believe it is very unlikely that the Trump administration imposes tariffs (on Europe) from the beginning and that this threat will be more of a bargaining chip in negotiations.” In that sense, they point out that Europe, unlike other regions, “should be less worried than other regions because it can take credible retaliation with these taxes.” Something which gives more room to the euro than some are showing.

In addition, the Fed has to go in line with Trump and manage to avoid inflation, if not achieve this by not having sufficiently restrictive rates.”This inflation will cause the dollar to end up depreciating“. In summary, the German bank states that “there are really few signs to expect extreme strength of the dollar and, although specific episodes could be seen with the euro even below parity, the perspective is that these levels are not sustainable.”

For their part, analysts such as those of Julius Baer even speak of a rebound towards 1.08 dollars per euro. This is mainly due to the fact that “in the long term, the increase in looming deficits will be key” for the future of the exchange between currencies. In any case, they now expect a period of calm after the recent increases given that “the electoral uncertainty is already out of the market sentiment and now everything will depend on the data and the Fed until Trump takes command with his inauguration on January 20 “.

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