(BFM Bourse) – The election of Donald Trump has led several research offices to reconsider the evolution of the dollar against the currency of the monetary union. Several of them consider a return to parity credible within several months.
The American presidential election was expected to be a major catalyst for the dollar. The event, which gave a large victory to Republican Donald Trump, did not disappoint. Since the beginning of October, when the market began to anticipate the election of the businessman, the dollar has jumped around 5.2% against the euro and accelerated its progress after the outcome of the vote. The eurozone currency is trading at more than one-year lows against the dollar, currently trading
around $1.0555.
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For multiple reasons, the policy desired by Donald Trump is perceived as favorable to the dollar and therefore unfavorable to the euro. First of all because, although inflationary, it is supposed to amplify growth in the United States, which would support the American currency. Then because the increase in customs duties desired by the businessman, particularly vis-à-vis China, risks harming other international currencies.
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Upward pressure on rates
Donald Trump's agenda incorporates “a realistic possibility of US tariffs of 60% or more on China and across-the-board tariffs of 10% or more, increasing the chances that ex-US dollar currencies will depreciate through against the greenback to anticipate the loss of competitiveness on American markets implied by customs duties”, explains UBS.
“This is true even if it is true that the process to achieve this result may take many months and that the actual customs duties may not be collected before the end of 2025 / beginning of 2026 at the earliest,” the bank clarifies.
Furthermore, investors also believe that Donald Trump's economic policy will result in an increase in deficits, which is pushing up US bond yields. Mechanically (the higher the rates, the stronger the demand for a currency tends to be) this supports the dollar against other currencies.
In addition, the businessman's economic policy risks causing the American Federal Reserve (Fed) not to raise rates as quickly as it would have done otherwise.
“As American data has proven relatively resilient overall, any new questions about the extent of the Fed's rate cut (American Federal Reserve, Editor's note) if a Republican administration launches a new wave of measures considered stimulating for the economy can only help maintain the healthy yield premium of the dollar compared to its main rivals”, explains UBS.
In this context, how far can the euro fall against the dollar? Low, very low even, according to several design offices. “The Eurodollar could quickly return to 1.05 or even get closer to parity. The prospect of customs tariffs traditionally tends to strengthen the currency of the country which puts them in place – in this case the dollar. The mechanism is well known: by implementing prohibitive customs tariffs, this will cause a drop in American imports which, in turn, will induce a reduction in demand for foreign currencies in relation to the dollar,” wrote William Gerlach, of iBanfirst, last Wednesday.
“In this case, the market also seems to sanction European economic weakness,” he added.
Parity or less
Several research offices also believe that the euro should approach or even break parity against the greenback in the more or less medium term. That is, a euro should be worth less than a dollar in the future.
In estimates published last week, UBS counted on a Eurodollar at 1.07 dollars at the end of December, at 1.04 at the end of December 2025 and at 1.00 dollars at the end of 2026. The Swiss bank does not rule out taking profits on the dollar in the short term. “But from a longer-term perspective, the logic for US dollar strength in this setting is sound,” UBS writes.
For Deutsche Bank, “if the Trump agenda is implemented quickly and in full force, without a countervailing political response from Europe or China, we could see the Eurodollar fall through the parity until 'at 0.95 or even below'.
“This would be an overshoot that would take the real trade-weighted dollar to record levels, surpassing the Volcker period (named after Paul Volcker, president of the Fed from 1979 to 1987, Editor's note). One approach more balanced (…) would suggest a fall of the Eurodollar to 1.00 which would correspond to the historical records of the dollar without exceeding them,” adds the German bank.
Capital Economics also believes that the euro/dollar parity is “back on the cards”, and predicts that it could occur by the end of 2025.
Two main elements lead Capital Economics to establish this forecast. First of all, the customs tariffs wanted by Donald Trump will bring “a boost to the American dollar”, considers, in turn, the economic research office.
An ECB more accommodating than the Fed
Then, Capital Economics judges that the European Central Bank (ECB) will lower its key rates more than the market expects, unlike the Fed.
“After all, the Fed is widely expected to respond to the inflationary effect of tariffs by easing policy more slowly and less than it otherwise would have done, while the economic shock of the slowdown in exports could encourage the ECB to relax its policy more than it would have done,” explains Capital Economics.
“The collapse of the German government could boost the euro if the next government eases fiscal policy, but for now the uncertainty only adds to the short-term headwinds weighing on the currency,” continued the think tank.
The fall of the euro against the dollar risks being even faster in reality. “This is the worst scenario you can imagine for the euro,” Mark McCormick, global head of currency and emerging markets strategy at TD Securities, told Bloomberg, who expects the euro falls to 1.03 dollars by the time Donald Trump takes office? in January. Parity “is absolutely in play” after that, he added.
Also cited by the agency, the Japanese broker Mizhuo International sees the euro at 1.01 dollars no later than next March…
Classes were stopped on Friday afternoon.
Julien Marion – ©2024 BFM Bourse
