Economists Predict Return to Parity Between Euro and US Dollar

Forex - The potential for a series of new tariffs under the Trump administration has led some economists to predict a return to the euro-US dollar parity. A weak economic outlook for the eurozone and increased geopolitical tensions in Russia are also putting pressure on the euro.

James Reilly, a senior market economist at Capital Economics, stated, "The euro has suffered more than others following Trump’s victory, and we are skeptical that this will end anytime soon," predicting that the euro will reach parity with the dollar by the end of 2025.

Reilly observed that the Federal Reserve might continue to lower interest rates more slowly, supporting the dollar, while the European Central Bank could ease monetary policy more than usual due to the "economic impact of slowing exports."

The economist added that various uncertainties remain, including whether tariffs will be legally enforced, if they are merely a negotiating tool or semi-permanent, and whether specific countries or goods will be exempt.

George Saravelos, the head of global FX research at Deutsche Bank (NYSE:DB), also noted that uncertainties are high, with key factors being "the scale and speed of policy changes." Saravelos warned, "If the Trump agenda is implemented with full force and quickly, without a policy response from Europe or China, we could see [the euro-US dollar] fall to 0.95 cents or even lower," adding that this breach would push the trade-weighted dollar to record levels.

Modeling by Barclays economists indicates that a 10% tariff on European goods, followed by retaliation, would bring the euro to dollar parity.

A similar outcome was mentioned by Goldman Sachs as a possibility in their 2025 currency outlook. Goldman stated that the expectations surrounding Trump’s tariffs and fiscal reforms have led them to revise their view that the dollar will gradually decline throughout the year, now seeing it as "stronger for a longer period." Simultaneously, they noted that their economists do not see a favorable economic outlook for a gradual euro recovery, thus lowering their euro forecasts.

However, Goldman also indicated that if trade policy turns out to be "more benign" or if real rates adjusted for inflation in the eurozone remain unexpectedly high, the euro could potentially deliver an upside surprise.