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The euro has fallen to its lowest in almost two years against the dollar, as the single currency is buffeted by the spectre of US tariffs and the escalation of the war in Ukraine.
The euro fell 1 per cent to $1.036 on Friday, its weakest level against the dollar since late 2022, dragged down by weaker than expected business activity data for the euro area. The currency has fallen sharply since the US election earlier this month as investors bet that Donald Trump’s plans for broad global tariffs will hit EU growth and encourage the European Central Bank to cut interest rates more aggressively.
Trump’s “decisive election victory is reinforcing expectations for a more prolonged period of US exceptionalism”, encouraging an “even more overvalued” dollar, said Lee Hardman, senior currency analyst at MUFG.
“A trade war with the US is the last thing Europe needs right now with growth already weak,” he added.
A purchasing managers survey for the eurozone on Friday showed that business activity unexpectedly declined this month. The index fell to 48.1, below the 50 level that separates expansion from contraction.
The euro’s fall was also a response to the worsening geopolitical situation in Europe, and its implications for the Eurozone economy, amid Russia’s deepening war with Ukraine, analysts said.
Chris Turner, global head of markets at ING, said a rise in natural gas prices had raised anxiety over the potential impact on the Eurozone’s trade balance and the knock-on for the currency.
“Traders recall the spike in natural gas prices in 2022 and what it did to European currencies,” he added.
The euro has been sliding since September, partly a victim of so-called Trump trades that intensified following the US presidential election.
Investors are betting that the president-elect’s promised mix of tax cuts and tariffs will put upward pressure on inflation and interest rates in the US, but weigh on EU growth.
The dollar — which got a shot in the arm from lower than expected jobless numbers on Thursday — has been on a stop-start rally in recent sessions as traders follow signals as to Trump’s likely cabinet pick for Treasury secretary, guessing at whether a particular appointee might moderate his tariff and other plans.
Investors have warned that the prospect of significant tariffs against the EU and its major trading partner China could move the euro to parity with the dollar in the coming months.
That is partly due to a change in interest rate expectations. Traders have moved to price in faster cuts to the ECB’s benchmark lending rate because of the dimmer outlook for the bloc’s export-exposed economy.
Investors are now broadly expecting a quarter-point rate cut at each of the next four ECB meetings, according to levels implied in swaps markets.
