Euro faces more headwinds amid growth, Trump concerns

The euro has fallen out of favour amid investor concern that Europe’s economy will suffer if Donald Trump imposes tariffs on US imports, potentially leading policymakers to cut interest-rates more aggressively.Signs of stagnating growth and political turmoil in Germany and France, the bloc’s two biggest economies, have also contributed to the selling.The common currency has been blighted by the prospect that US trade tariffs will hit the region’s already battered economy. It fell about 3% in November to $1.0575, just off a two-year low reached earlier last month.That’s the biggest monthly slide since May 2023."Europe is now a consensus short,” said Luca Paolini, chief global strategist at Pictet Asset Management. "You have policy fragmentation, very weak growth and all the risk involved with Russia and Ukraine.”On the other hand, the dollar recently posted its longest weekly advance in over a year as Trump’s presidential victory and persistent economic growth pushed traders to boost their bets on further gains.The Bloomberg Dollar Spot Index climbed as much as 0.7% on November 22, capping an eight-week rally, the longest since September 2023.The euro fell to a two-year low and the Swiss franc slid to the weakest against the greenback since July.The dollar’s rally has been fuelled by speculation that Trump’s tariffs and tax cuts will fan inflation and add fuel to an economy the Federal Reserve has already been trying to restrain.That has caused traders to dial back expectations for how much the Fed will cut interest rates in the months ahead, driving up bond yields and giving overseas investors an incentive to shift money to the US.While the dollar has surged since Trump’s election victory, the euro has been the worst performer among Group-of-10 currencies. That’s largely due to expectations the European Central Bank will lower borrowing costs by 150 basis points through the end of 2025, roughly double the amount forecast for the Fed.Last week, the common currency got some relief from hawkish ECB comments and the fact that Trump didn’t mention Europe in his latest round of tariff threats, instead targeting Canada, Mexico and China.Appetite for selling the euro also diminished after it quickly recovered from a fall below $1.05, a key level for traders.Still, investors are bracing for more losses next year on mounting signs the economy is struggling.Business activity in the eurozone unexpectedly shrank, fuelling concerns about the prospects for Europe’s economy and suggesting the ECB will need to be more aggressive with interest-rate cuts.The composite Purchasing Managers’ Index by S&P Global slid to 48.1 from 50 in October, dipping back beneath the level that separates growth from contraction. Analysts had estimated no change and were particularly surprised by a steep deterioration in services, where activity dropped for the first time since January.The euro fell to its weakest levels since 2022 against the dollar as traders priced in more interest-rate cuts from the ECB.The figures will feed concern about the prospects for Europe’s economy, which is already under threat due to the collapse of Germany’s government, France’s fiscal struggles and the trade tariffs that could ensue once Trump returns to the US presidency.Investors now expect ECB rates to fall to about 1.75% next year, while economists polled by Bloomberg see them declining to 2% in the second half of 2025.Hedge funds and other leveraged investors increased their bets on a weaker euro to the highest in three years, according to the latest CFTC weekly data, and a growing number of strategists expect it to fall to parity versus the dollar.