Possible Europe-US trade war could push euro into parity with the dollar

The euro risks falling to parity with the US dollar for the first time since late 2022 if a new transatlantic trade war weakens the already struggling eurozone economy, analysts have warned.

The euro sank below $1.04 against the dollar, the weakest level since November 2022, last Friday after a survey of European purchasing managers showed eurozone private sector output has fallen this month.

The threat of new US tariffs on imports from Europe has pushed the euro lower since the US election – it was worth $1.09 on 5 November but has since dropped against the dollar for three weeks running. It ended last week at $1.041, but could have further to fall once Donald Trump’s new administration lays out its economic plans.

Trump has floated the idea of imposing a 60% to 100% levy on Chinese products and a 10% to 20% levy on goods from the rest of the world, which would make European exports to the US less competitive and could damage economic growth.

Deutsche Bank analyst George Saravelos has calculated that the full impact of Trump imposing new tariffs, clamping down on immigration and increasing net fiscal spending by extending tax cuts is only 30% “priced in” by financial markets, indicating that the currency could experience a significant sell-off if the measures are implemented.

Saravelos told clients last week that “the bottom line is the market is still not pricing a lot of Trump”.

“We remain bullish on the dollar and would view euro-to-dollar levels of 1.00 as pricing the intensity of the Trump policy mix at closer to 50%, with potential for even greater downside depending on what happens next year,” Saravelos added.

Last Friday’s dire PMI survey showed eurozone business activity moved back into contraction in November, sparking a flurry of bets on steep cuts to interest rates in the single currency bloc next month.

Money market pricing suggests investors now price a 50% chance of a half-point, or 50-basis point, rate cut at the European Central Bank’s December meeting, with a smaller quarter-point cut now fully priced in. The eurozone deposit rate is 3.25%, following a cut last month.

The fortunes of several key eurozone economies are in the spotlight with Germany, traditionally the engine of the bloc, expected to hold a general election fought against the backdrop of a stagnating economy and France forecast to experience a slowdown in growth.

“The composite eurozone PMI slumped to 48.1, thanks to an unexpected dive to 49.2 in the services sector that has hugely increased the odds of a 50bp rate cut in September,” said foreign exchange market analyst Kyle Chapman at Ballinger Group.

“The euro is decisively breaking through key levels, falling below 1.04 for the first time since the energy crisis in late 2022. Having crossed this threshold, parity is no longer a huge leap,” Chapman added.

However, Donald Trump’s choice of Scott Bessent as Treasury secretary could possibly offer the euro a reprieve.

The nomination of Bessent, a billionaire hedge-fund manager, is “expected to receive a tick of approval from global markets”, predicted Tony Sycamore, market analyst at IG, due to his “expertise” and previously stated preference that “tariffs be layered in gradually”.

Bessent told Bloomberg TV this month that falling inflation would lead to lower interest rates, and “a market-based dollar depreciation”.

However, economists expect new US trade tariffs to be inflationary, leading to higher interest rates and a strong dollar. In this scenario, the US Federal Reserve keeps US interest rates high to fight inflation, while the ECB cuts borrowing costs sharply to fight off a eurozone recession.

Analysts at ABN Amro predict the return of President Trump is likely to mean a “significant rise in US import tariffs” in 2025, with China bearing the brunt, but Europe also hit.

“All of this is likely to drive a divergence in Fed and ECB policy, with slower and fewer Fed rate cuts, and the ECB deposit rate falling to 1%,” they forecast last week. “This will push the euro to parity vs the dollar in the course of 2025.”