Trump policy moves the euro closer to parity with the US dollar

Economists expect the euro to fall to parity with or below the US dollar next year. This means that the currency exchange rate is 1:1.

The euro is used in 20 of the 27 European Union countries: Austria, Belgium, Croatia, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, and the Netherlands. , Portugal, Slovakia, Slovenia and Spain.

The currency most recently reached parity with the dollar for the first time in 20 years in 2022, but has since rebounded.

James Riley, senior market economist at Capital Economics, said in a Nov. 11 research note that euro parity is now “back to reality again.”

“The euro has fallen more than any other market following Trump’s victory, and I don’t see it stopping anytime soon,” he said.

As of 10 a.m. ET Friday, 1 euro was equivalent to about $1.06. The price has fallen about 3% from about $1.09 at the close of the market on election day.

ICE US Dollar Index (DXY) was also on a recent winning streak, Riley told CNBC. Last week was the eighth consecutive week the index rose, an “extreme increase” that has only happened three times since 2000, Riley said.

Travelers can take advantage of these currency trends by deferring purchases until next year. For example, hotels and tours in Europe allow you to book now and pay later for 2025. Of course, please understand that this is not a guarantee that the euro will continue to decline against the dollar.

Economists said tariffs and trade policy are the main factors influencing the EUR/USD currency trend.

President Trump has imposed extensive tariffs on trading partners around the world.

During his campaign, he proposed imposing a 10% or 20% tariff on all imports, including those from the European Union. On Monday, he signaled his desire to introduce import taxes, pledging to impose a 10% tariff on China and a 25% tariff on all products from Canada and Mexico on his first day in office.

However, the final scope and scale of the tariff policy is unclear.

Economists said tariffs on Europe could reduce demand for exports, weaken the European economy and weaken the euro.

Economists say interest rate differentials also have a big impact on relative currency movements. They expect the interest rate differential between the US and the euro area to widen, due in part to the impact of tariffs.

Riley said the tariffs are expected to be “inflationary for the United States.” These import taxes are paid by U.S. companies, who typically pass on the higher costs to consumers.

Federal Reserve officials could keep interest rates high for an extended period of time to bring inflation back to their long-term goals. Meanwhile, economists expect the European Central Bank to continue cutting interest rates.

Wells Fargo’s McKenna said tariffs on the euro zone would likely force the ECB to cut rates further to support the European economy, widening the interest rate differential and favoring the dollar “pretty dramatically.” .

There are other factors as well.

As an example, in stark contrast to Europe, the U.S. economy has “held up much better than anyone expected” over the past year or two, Riley said.

Financial markets also dislike uncertainty, McKenna said.

McKenna said if question marks over the Trump administration’s policies destabilize markets in the short term, investors would likely seek dollar-denominated safe-haven assets such as U.S. Treasuries, which would strengthen the dollar. Ta.

Of course, there is a risk that Europe could retaliate with its own tariffs or penalize Americans in some way by raising certain consumer prices, such as airfares, Reilly said.

“We don’t think that will happen,” he said. “We think Europe wants as much free trade as possible.”