Key information
- The euro stabilized against the US dollar on Tuesday, despite US President-elect Donald Trump's threats of 25 per cent tariffs on Canadian and Mexican imports.
- Analysts predict that these tariff declarations could trigger trade negotiations between the United States and its trading partners, leading to increased volatility in currency markets in the coming months.
- The euro initially fell against the dollar, but eventually recovered its losses on Tuesday and closed the session slightly higher.
Despite US President-elect Donald Trump's threats of 25 percent tariffs on Canadian and Mexican imports, the euro stabilized against the US dollar on Tuesday. The Canadian dollar and Mexican peso both saw significant declines against the dollar, hitting multi-year lows in response to Trump's announcement.
Analysts predict that these tariff statements could trigger trade negotiations between the United States and its trading partners, which could lead to greater volatility in currency markets in the coming months. Although the euro initially fell against the dollar, it finally recovered its losses and ended the session slightly higher on Tuesday. The single currency held just above 1.05 at the time of publication of this article.
Factors contributing to pressure on the euro
However, last Friday saw a significant decline in the euro against the dollar, hitting a two-year low of 1.0474 since Trump's election victory on November 5. This downward trend is expected to continue due to current global economic and political conditions.
Several factors are likely to contribute to the continued pressure on the euro against the dollar. First, Trump's threats of tariffs could encourage trading partners to hedge their risks by exchanging local currencies for U.S. dollars to mitigate potential asset devaluation. This shift in demand could strengthen the US dollar and weaken the euro.
Second, the minutes of the recent Federal Reserve meeting indicate a preference for gradual rate cuts in the context of a resilient economy. Some officials have even suggested the bank could suspend rate cuts if inflation persists. This aggressive stance should continue to exert downward pressure on the euro.
Additional pressures on the euro
Additionally, the euro lacks strong fundamentals to counter the US dollar's momentum. Trump's threats of tariffs negatively impacted European auto stocks on Tuesday, leading to a decline in sentiment across the continent, with all major stock benchmarks ending lower.
During his campaign, Mr. Trump proposed imposing 10 percent tariffs on imports from most countries and 60 percent tariffs on Chinese goods. If these tariffs are implemented, the euro may have to weaken further to support European exporters. Furthermore, China's vulnerability to US tariffs could reduce its demand for European products, which would indirectly affect the Eurozone economy.
Kyle Rodda, senior market analyst at Capital.com, warned of potential continued weakness in the euro: “If we continue on the same trajectory and the Trump administration follows through on the tariffs, then I suspect the euro and yuan to continue to weaken, especially as it is only a matter of time before Trump posts something aggressive on social media about a major European economy or China a once again. »
Short-term opportunities for the euro
Short-term rebound opportunities exist for the euro. Markets are anticipating the release of the euro zone's flash consumer price index (CPI) for November on Thursday, which is expected to rise to 2.3 percent from 2 percent in October. Rising inflation could prompt the European Central Bank (ECB) to take a tougher stance, which would provide some support to the euro.
US government bond yields fell after hitting a four-month high following Trump's nomination of hedge fund executive Scott Bessent as Treasury secretary. Mr. Bessent is seen as less aggressive on tariffs, which could ease global trade tensions. A slowdown in dollar strength could provide temporary relief to the euro, as currency trends often have a positive correlation with bond yields.
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