Euro-dollar 1:1 seen as Trump 2.0 set to begin

The euro has been blighted by the prospect that Europe’s economy will suffer if President-elect Donald Trump imposes tariffs on US imports, potentially leading policymakers to cut interest rates more aggressively.
Signs of stagnating growth in Germany and France, the bloc’s two biggest economies, have also contributed to the selling.
The common currency kicked off the year on a grim note, and hedge funds see it hurtling toward parity with the dollar — if not lower — in the coming months.
The negative sentiment has been building for a while, with hedge funds having held bearish positions on the common currency since late September, according to Commodity Futures Trading Commission data. Asset managers have also pared bullish bets.
The euro declined about 1.3% last week to trail all but two of its Group-of-10 peers as jitters about Europe’s economic growth outlook and the prospect of more US tariffs rattled investors.
Selling momentum may gain traction if the region’s growth prospects weaken further, with the common currency ranking among the most liquid assets to trade.
Since the euro came into existence in 1999, the currency has traded at equal value to the US dollar only a handful of times.
The last instance was in 2022, after Russia’s full-scale invasion of Ukraine sparked an energy crisis in Europe and provoked fears of a recession, plunging the currency pair to a 1:1 ratio for the first time in two decades.
Now, market watchers see a chance it will happen again.
Europe is one of the most vulnerable regions to Trump’s threat to increase tariffs on US imports. The US is a big buyer of the European Union’s exports, from cars to chemicals to luxury handbags, and tariff hikes would weigh on the single market’s already weakening economy.
The euro’s weakness is also related to the broad-based strength of the US dollar. Demand for assets denominated in the US currency has been growing on expectations that the Trump administration’s policies will stoke economic growth and corporate profits in the US.
The relative outperformance of US assets is a trend that’s weighed on most major currencies in the year to date.
In the wake of the US election, at least 10 banks are now expecting a weaker euro, with some even predicting a move below the 1:1 threshold in 2025.
But the expectation of parity is not unanimous.
There’s still a lot of uncertainty about the magnitude and speed with which Trump’s policy proposals might be implemented. And there’s some optimism that they’d be met with measures to stimulate economic growth in Europe.
Hitting parity is psychologically significant for investors and policymakers and could spur a period of volatility for the euro as billions in options bets are likely to be linked to it.
But the risk that a country could tumble out of the euro remains alive, if remote, and a fall to parity could embolden populist politicians who oppose the single currency.
Already Germany’s right-wing AfD party is planning an election campaign advocating the country’s exit from the EU and the single currency.
Policymakers often welcome a weaker currency as a means to stimulate economic growth because it makes exports more competitive — though that positive impact may be diminished if the US imposes tariffs on those goods.
But a weaker euro also makes it more expensive to import raw materials and could reignite price pressures. That would prove to be a headache for the European Central Bank, which had been hoping post-pandemic inflation was finally under control.
For consumers, a weaker euro makes it more costly to buy imported goods and vacation outside of the eurozone. Conversely, the tourism sector may benefit from an influx of visitors from the US.