The euro is hovering near its weakest point in over two years, with threats from potential Trump tariffs, diverging central bank policies, and geopolitical uncertainties raising the risk of parity with the dollar by early 2025.
The currency dropped below 1.03 on January 10, reaching levels last seen in October 2022. This decline followed stronger-than-expected US employment data and expectations of continued tight monetary policies from the Federal Reserve, putting the euro dangerously close to parity.
During summer 2022, the euro fell below parity, hitting $0.95 in September amid aggressive Federal Reserve rate hikes, delayed European Central Bank (ECB) responses, and a European energy crisis. Similar pressures could push the euro below parity once again in 2025.
The euro’s decline since Donald Trump’s election victory in November 2024 has been significant, but the full effects of his economic policies are still unfolding.
Key measures from Trump’s administration include substantial tariff hikes—up to 60% on Chinese goods and 10-20% on imports from other regions, including Europe—and tax cuts for US corporations and individuals. These measures, combined with Trump’s push for increased NATO spending and doubts over transatlantic relations, present major risks for the euro.
Trump’s Policies and Trade Challenges
Higher US tariffs on European goods, particularly automobiles and pharmaceuticals, could weaken Europe’s export competitiveness.
The European Union exported €502.3 billion in goods to the US in 2023, with machinery, vehicles (€207.6 billion), and chemicals (€137.4 billion) dominating the trade. New tariffs could reduce demand for these products, diminishing the euro’s value.
Goldman Sachs analyst Kamakshya Trivedi explained that foreign exchange markets often underestimate tariff risks, suggesting the dollar could strengthen as these policies take effect.
This pressure could have long-term implications for European trade, making it harder for the euro to recover.
Policy Divergences and Geopolitical Risks
Trump’s tariffs and tax cuts are expected to fuel inflation in the US while stifling economic growth in Europe.
Higher US inflation might force the Federal Reserve to maintain elevated interest rates, while Europe’s weaker growth could prompt the ECB to ease monetary policies. Goldman Sachs estimates this divergence could lower the euro’s value by 3% under normal scenarios or up to 10% if Trump’s policies are fully implemented.
Additionally, geopolitical uncertainty is adding to the euro’s challenges. Trump’s demand for NATO allies to increase military spending to 5% of GDP and his scepticism about US support for Ukraine have unsettled transatlantic relations.
Energy policies remain a concern as well. Europe’s natural gas crisis in 2022 led to costly liquefied natural gas imports from the US, increasing dollar demand. A repeat of this scenario could further strain the euro.
The Road Ahead
The combination of Trump’s tariff threats, monetary policy divergences, and geopolitical shifts leaves the euro in a precarious position.
While markets await further guidance from central banks and policy announcements from the US administration, the euro remains at risk of testing parity with the dollar in the first half of 2025.
Whether the euro will reach new lows depends on the extent of US policy changes and Europe’s ability to mitigate their impact. For now, the single currency’s outlook appears increasingly uncertain.