Parity between the dollar and the euro? Not so fast | Financial markets

The stars appear to have aligned to give analysts and the financial media an open headline streak worthy of a few days’ cruise, thanks to a phenomenon called the “Trump trade” and an economic environment and business results that are more favorable than they otherwise would have been. to be expected. Add to this the seasonal phenomenon at the end of the year: while the market usually panics about missing a party, this on the last day of the year (when balance sheets are released) causes panic.

Besides stock market highs, the explosion of certain assets or the lysergic combination of Elon Musk, Donald Trump and memcoins, another theme of the month is the rise of the dollar against the euro. The logic so far has been simple, and we’ve said it with some emphasis: Under Donald Trump, we expect more inflation (due to tariffs, tax cuts, and immigration restrictions) and larger deficits, which will push long rates higher. . In Europe, by contrast, growth is expected to be lower due to the risk of a tariff war as well as political instability. Especially in Germany.

The euro rose from 1.093 just before the US elections to a low of 1.05 recorded this Wednesday. A 4% decrease seems insignificant. But the euro has actually started to lose ground as polls (and online betting signals) have cooled Harris’ chances, with the currency down 12% since the start of October. If we exclude the rally in the week before the elections, the chart resembles the decline of the Tourmalet.

The power of the market seems unstoppable and the fate of the economy seems set in stone. However, some analysts are clarifying the progress of this operation. “Part of the dollar’s ​​strength is due to the US’s much looser fiscal policy than the rest of the G10,” they explain at Bank of America. “The situation has weakened further this year as the dollar returned to its all-time high in real effective terms; An even looser fiscal policy could boost the currency in the short term, but this will not be sustainable in the long term,” he concludes.

“Markets assume Trump 2.0 will mirror Trump 1.0, resulting in nearly 100 basis points of Federal Reserve cuts being written off next year,” UBS said. “However, we believe that expecting Trump 2.0 to be the same as Trump 1.0 is dangerous. The starting point is very different from 2017. The Fed is now cutting rates (not raising them), debt is twice as high, and the economy is slowing. Moreover, the rest of the world is better prepared to resist American isolationism. “Trump’s proposed policies are expected to widen the twin deficits (trade and fiscal), undermining the dollar’s long-term attractiveness,” the organization said.

Beyond these considerations, if the market has already accepted the idea of ​​a strong dollar, news that contradicts this consideration (such as a timid Harris rally) could potentially cause a trend reversal. When the Trump deal allows this to happen, the market will likely be driven by macroeconomic data again, and parity will be just as far away, but will seem more elusive.