Euro-dollar parity: could the euro fall below the value of the greenback in 2025?

The euro, near its weakest level in two years, faces growing risks from Trump’s tariff plans, divergent Fed and ECB policies and geopolitical uncertainty.

As the euro nears its lowest levels in more than two years, the looming shadow of Donald Trump’s new tariffs, divergent monetary policies and transatlantic geopolitical shifts raises a tantalizing question: will the euro pass? will it fall below parity with the dollar in the months to come?

How close are we to parity?

The euro fell below 1.03 on January 10, reaching its lowest levels since October 2022, as stronger-than-expected US job growth in December supported the dollar in the expectation of policy tightening from the Federal Reserve. The euro is thus dangerously close to parity, a psychologically significant threshold.

These levels reflect those of the summer of 2022, when the euro not only reached parity, but also crossed it, plunging to $0.95 in September.

At the time, the Federal Reserve’s aggressive start to interest rate hikes, the European Central Bank’s (ECB) delayed response and a natural gas crisis in Europe created a perfect storm for Europe’s common currency.

Could a similar set of pressures push the euro below parity once again in early 2025?

Despite the significant weakening of the euro since Donald Trump’s election victory in November 2024, the impact of his administration’s economic policies could still be felt.

Among Trump’s top priorities are radical increases in tariffs – up to 60% on Chinese goods and 10-20% on imports from other countries, including Europe – combined with tax cuts for American businesses and individuals.

Additionally, the president-elect’s demands for increased European NATO spending and his skepticism about transatlantic commitments have created new geopolitical tensions.

These policies could harm the euro through three main channels.

1. A new shock for European trade

Increasing tariffs on European products, particularly automotive and pharmaceutical products, will harm Europe’s export competitiveness.

According to the European Commission, the EU exported for 502.3 billion euros of goods to the United States in 2023which represents 20% of its total non-EU exports, with machinery, vehicles (207.6 billion euros) and chemicals (137.4 billion euros) making up the majority of these exports.

Higher tariffs could make European products less competitive in the U.S. market, reducing demand for euros.

Although this adjustment will take time, it could put lasting downward pressure on the currency.

Kamakshya Trivedi, an analyst at Goldman Sachs, recently noted that “foreign exchange markets generally have difficulty assessing tariff risks in advance.suggesting that the dollar could strengthen further once these policies are implemented.

2. Divergent policies between the Fed and the ECB

Trade policy is not the only factor putting pressure on the euro.

Tariffs and tax cuts are likely to fuel US inflation while dampening European growth, leading to divergences in monetary policies.

Rising U.S. prices could prompt the Federal Reserve to keep interest rates higher for longer, while Europe’s weaker growth could push the European Central Bank to ease monetary conditions to boost demand .

“Diverging policy positions could push the euro down by 3% in a base case scenario, but the decline could reach 10% if tariffs and tax cuts are fully implemented”estimates Goldman Sachs. Such a change would likely trigger a large flow of capital from euro-denominated assets to the higher-yielding dollar.

3. Geopolitical uncertainty and energy policies

Geopolitical tensions and energy policy changes add another layer of vulnerability for the euro. President Trump’s calls for NATO members to increase spending to 5% of GDP, coupled with doubts about U.S. support for Ukraine, have destabilized transatlantic relations.

Energy remains a key concern. Europe’s natural gas crisis in 2022 has forced the bloc to import expensive LNG from the United States, which drove up costs and increased demand for dollars. A repeat of this dynamic, combined with geopolitical uncertainty, could once again weigh heavily on the euro.

What does the future hold for the euro?

The interaction of these factors – tariffs, monetary policy divergence and geopolitical changes – places the euro in a vulnerable situation.

While the markets cautiously await political announcements from the Trump administration and new directions from central banks, the probability that the euro will test parity with the dollar from the first half of 2025 remains tangible.

Whether these forces will drag the euro to new lows will depend on the extent of U.S. policy changes and Europe’s ability to counter their effects.

For now, however, the prospects for the single currency look increasingly fragile.