Global | Growing pressures on the euro

The euro/dollar pair has fallen sharply from the highs seen toward the middle of 2024 (1.12) to reach its current level of 1.04, representing a depreciation of 8%.

Key points

• Key points:
• This decline, one of the heaviest endured by the euro in recent years, is down to a combination of factors: the economic resilience of the United States, the re-election of Donald Trump —and the likely tightening of tariffs by his administration—, the growing weakness of the eurozone and a more adverse geopolitical environment.
• This environment has placed the euro in a position of vulnerability, while the dollar has strengthened for the same reasons.
• In the short to medium term, the euro is expected to continue trading below its equilibrium level. The interest rate spread between the Eurozone and the United States will continue to favor the dollar, especially as long as the Fed keeps rates high or presses ahead with limited rate cuts in 2025. Meanwhile, the ECB appears committed to a more aggressive easing cycle to counter the region’s economic weakness, which could prolong the euro’s depreciation.
• In this context, the possibility of the euro and the dollar reaching parity cannot be ruled out. Factors such as an intensification of Trump’s protectionist policies, a further weakening of growth in the eurozone, a more forceful monetary response from the ECB or, conversely, a Fed that barely reduces interest rates, could bring the EUR/USD closer to this psychological barrier.
• In the longer term, the euro is likely to begin a gradual appreciation around 2026. This process would be supported by an adjustment in monetary policies on both sides of the Atlantic, with the ECB returning to a more neutral tone and the Fed moving forward with its rate-cutting cycle.

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