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EURUSD on track to hit parity
Economists expect the euro to fall to or even below dollar parity next year. This means the exchange rate between currencies is 1:1.
euro is been used 20 of the 27 EU countries: Austria, Belgium, Croatia, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
The currency last hit parity with the U.S. dollar in 2022 for the first time in two decades before rebounding.
Now, euro parity has “re-emerged,” James Reilly, senior market economist at Capital Economics, wrote in a Nov. 11 research note.
“The euro has been hit harder than most by Trump’s victory, and we doubt this will ease anytime soon,” he wrote.
As of 10 a.m. ET on Friday, one euro was equal to about $1.06. That’s down about 3% from its election day close of about $1.09.
ICE U.S. Dollar Index (Lilac GardenRiley told CNBC that it has also been on a winning streak recently. Reilly said last week the index rose for an eighth consecutive week, an “extreme move” that has only occurred three times since 2000.
Travelers can try to defer purchases until next year to take advantage of these currency dynamics. For example, European hotels or travel allow you to book now for 2025 but pay later, allowing you to defer the cost—of course, this doesn’t guarantee that the euro will continue to weaken against the dollar.
Tariffs, interest rates and a strong economy
Economists say tariffs and trade policy are the main factors influencing the dynamics of the euro-dollar exchange rate.
Trump has imposed widespread tariffs on trading partners around the world.
However, the final scope and magnitude of the tariff policy are unclear.
The euro has been hit harder than most since Trump’s victory, and we doubt this will ease anytime soon.
James Riley
Senior Market Economist, Capital Economics
Economists say tariffs on Europe could reduce demand for its exports, leading to a weaker European economy and a weaker euro.
Economists say interest rate differentials also have a large impact on relative currency movements. They expect interest rate differentials between the United States and the euro zone to widen, in part due to the impact of tariffs.
Reilly said the tariffs are expected to “cause inflation in the United States.” These import taxes are paid by U.S. businesses, which typically pass the higher costs on to consumers.
Fed officials are likely to keep interest rates higher for longer to bring inflation back to their long-term goals. Meanwhile, economists expect the European Central Bank to continue cutting interest rates.
Wells Fargo’s McKenna said euro zone tariffs could lead to further interest rate cuts from the European Central Bank to boost the European economy, creating a widening interest rate spread that would “pretty significantly” benefit the dollar.
There are other factors.
First, the U.S. economy has done “much better than anyone expected” over the past year or two, in stark contrast to Europe, Reilly said.
Additionally, financial markets don’t like uncertainty, McKenna said.
McKenna said that if questions surrounding the Trump administration’s policies disrupt markets in the short term, investors may seek dollar-denominated safe-haven assets such as U.S. Treasuries, strengthening the dollar.
Of course, Europe could retaliate by imposing tariffs or punish Americans by raising prices on certain consumer goods, such as air tickets, Reilly said.
“We don’t think that’s going to happen,” he said. “We think Europe wants to trade as freely as possible.”
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