The euro falls against the dollar and the ghosts of parity rise to the surface

Donald Trump’s victory in the US elections caused a hurricane in the market. Stock markets are not only adjusting to new expectations stemming from the new president’s campaign promises: other assets such as fixed income or currencies are also being impacted, and in the case of the euro/dollar, the impact could be huge in the coming months. The euro’s initial reaction was violent: lThe European currency is losing 1.6% against the US dollar, its most important currency, the worst drop since the worst of the pandemic.. The euro is currently trading at $1.07, and many analysts are warning of the risk of the exchange rate returning to parity (one dollar per euro) in the coming months.

The collapse that the euro is experiencing against the dollar on the first day since Donald Trump’s victory became known is the worst since 2020, during the worst, most difficult moments of the pandemic for markets. This is the fourth worst session in almost 9 years for the European currency, an example of the impact of the Republican candidate’s election victory.

The currency movements are linked to the impact of the election results on the monetary policies of the Federal Reserve and the European Central Bank. The broad consensus among economists is that Trump won with an economic program that will lead to even more inflation. Almost everyone warns that if the new president keeps his promise to impose tariffs, and if he decides to crack down on immigration, it will lead to even more inflation. AND If this happens, the Federal Reserve will not be able to lower interest rates as much as the market had assumed.

In fact, long-term inflation expectations in the US have risen sharply this Wednesday and have already reached 2.6%. This assumes the market expects the inflation rate to be the same for five years from now, pushing the Fed’s target away from 2% and forcing the US central bank to keep rates higher than it had assumed. However, there has been no movement in eurozone inflation expectations and, therefore, all indications are that the ECB will be able to continue the path of rate cuts it began this year.

In this context, investors began to buy dollars, expecting that interest rates in the US would be higher than in the eurozone. It should be remembered that the difference in rates is a favorable element for the country’s currency, which keeps it at a higher level, since money in international markets always looks for the asset that brings the highest return for the same risk. Thus, as interest in US bonds increases, expectations for the dollar rise (when an investor buys a dollar-denominated bond with another currency, this directly affects the exchange rate).

Analysts warn of possibility of parity

As soon as Trump’s overwhelming victory became known, many analysts began warning about the possibility that the euro-US dollar exchange would soon return to parity. Chris Turner, global director of markets at ING, explains why the election result is “negative for the euro/dollar as the rate differential against the euro widens and there is a new risk premium that needs to be taken into account due to protectionist policies as well as -due to a potential increase in geopolitical risk, the immediate target for the coming weeks is $1.05. “The move towards parity will wait until 2025, when the full potential of Trump’s protectionist policies will become clear.”warns.

In the same sense, “euro/dollar parity is a real possibility if Trump goes ahead with his tariff plan,” explained Michael Hart, senior strategist at Pictet Wealth Management in early October. Nour Al Ali, macroeconomics and markets strategist at Bloomberg, also points out that “the expectation of an aggressive rate-cutting process from the ECB, along with other headwinds, increases the risk that the euro will hit parity again in 2025, a scenario in which markets look set to , are increasingly ignored,” he insists.

For his part, George Saravelos, head of currency analysis at Deutsche Bank, believes that the danger of a trade war with China as the protagonist will force the ECB to cut interest rates more aggressively than what investors are currently ignoring in the markets, and that is what investors are now ignored. forces us to note that “This will cause the interest rate differential to reach an all-time high and the euro-dollar exchange rate to fall to around parity.”– he emphasizes.