LONDON (Reuters) -The euro has fallen to a one-year low, reviving rumors the currency could hit the $1 mark. Donald Trump’s US election victory raises the prospect of a tariff hike that could deal a new blow to the eurozone economy.
At around $1.05, the euro is down 6% from a more than one-year high in September as a weakening economic outlook held it back.
Euro/dollar is the most actively traded currency pair in the world.
Here’s a look at what’s driving the move in the euro and what the future could hold for the currency.
1. Can the euro reach $1?
It’s possible. Parity is just 5% off and the euro has traded below that level before – once in the early 2000s and again for a few months in 2022, when US interest rates rose faster than those in the eurozone, while Europe struggled with the rise in energy prices that followed the war in Ukraine.
For traders, the $1 mark is an important psychological level. A fall below this could therefore exacerbate negative sentiment around the euro, leading to further depreciation.
Major banks including JPMorgan and Deutsche Bank (ETR:) think there could be a drop to parity depending on the size of the rates. Tax cuts could also fuel U.S. inflation and limit Federal Reserve interest rate cuts, potentially making the dollar more attractive than the euro.
2. What does this mean for companies and households?
A weak currency usually increases import costs. This could cause food, energy and commodity prices to rise, exacerbating inflation.
Since hitting double digits two years ago, inflation has fallen rapidly, so the hit to prices from currency weakness should not be a major concern for now. Most economists expect inflation to return to the 2% target next year, after some volatility in late 2024.
Conversely, a fall in the euro makes exports cheaper – good news for, for example, European car manufacturers, industrialists and luxury retailers, and for individuals or investors with foreign incomes.
It is especially positive for Germany. Long considered Europe’s export engine, the German economy has suffered from a number of headwinds, including a weak Chinese economy.
3. Will the euro be put in the spotlight?
Not necessarily. Many currencies of major U.S. trading partners have been hit hard by tariff concerns over the past six weeks.
The euro has lost more than 4.5%, while the Mexican peso has lost 6% and the Korean won has fallen 5.4%. The euro actually rose 6% over the course of Trump’s last term, but fell almost 6% in the six weeks after the 2016 election before recovering.
And look at the Japanese yen. The dollar is down almost 10% against the greenback this year; the euro has fallen by less than half of that.
4. Is it really that bad?
Not everyone has a bearish long-term view on the euro. Many banks view parity as possible, but not necessarily probable.
Faster interest rate cuts by the European Central Bank (ECB) than in the United States would be negative for the euro, but on the plus side, that easing could also support the currency in the longer term by boosting economic growth prospects.
The eurozone economy grew by 0.4% in the third quarter compared to the previous three months, faster than forecast, positive for the euro. The collapse of the German government, potentially paving the way for growth-enhancing spending under the next administration, could also be supportive.
“Everyone is gloomy about Europe and we understand the gloom, but we could be in for some positive surprises,” said Benjamin Melman, CIO of Edmond de Rothschild, adding that he does not expect a significant downturn in the euro from now on.
5. What does this mean for the ECB?
The ECB is in a better position than the last time the euro weakened sharply – which was in 2022 and inflation soared, so the euro’s fall below $1 added pressure on the central bank to raise interest rates to increase.
Fast forward to today and inflation is trending lower. There are other reasons why a drop to $1 would not be a major concern for the ECB.
The ECB is paying more attention to how the euro performs against a basket of currencies from the euro area’s main trading partners. Looking at it that way, it doesn’t look that weak. The trade-weighted euro is down less than 1% over the past week and well above 2022 levels.
Economists also note that the pass-through of currency movements to inflation is relatively small, so the weakness of the euro will not delay interest rate cuts for the time being.
