Banks expect rare currency market event after Trump's inauguration
Photo: The Russian army suffered record losses in December 2024 (Getty Images)
While the US prepares for the former president's return to office, the currency market is preparing for a rare event: parity between the dollar and the euro, Bloomberg reports.
According to bank strategists, including those from Bank of New York (BNY) Mellon Corp and Mizuho, this will most likely happen after Donald Trump's inauguration later this month.
The single European currency has fallen by more than 7% against the dollar since late September, and last week, it reached 1.0226 per dollar, the lowest level in more than two years. Options markets suggest that the probability of the currency pair reaching parity this quarter is about 40%, and trading in contracts targeting this level surged last week.
Markets are looking for potential catalysts following January 20, the day Trump will be sworn in as president. BNY and Mizuho expect that Europe may become the target of a potential trade war and that diverging growth expectations between Europe and the United States could lead to a rare dollar strength not seen in the last two decades. Both banks see a move toward parity this month.
"We're not far off so it could happen very quickly," said Geoffrey Yu, senior strategist at BNY.
Parity
Since its introduction in 1999, the euro has traded at an equal value to the dollar only a few times, with the threshold often indicating relatively difficult economic conditions in the EU compared to the US. The last time this happened was in 2022, after Russia's full-scale invasion of Ukraine triggered an energy crisis in Europe and fears of a recession.
Europe's export-oriented economies are now struggling with the threat of US trade tariffs, reflected in expectations that the European Central Bank will have to aggressively lower interest rates, unlike the Federal Reserve's slower approach. Political instability in the bloc's largest economies is adding to the pressure.
"Sentiment couldn't be worse," said Anthony Foster, head of G-10 FX spot trading at Nomura. He believes that January 20 could be a potential catalyst for further euro weakening if Trump imposes tariffs shortly after his inauguration.
While the euro recovered this week amid general dollar weakness, other major banks, such as JPMorgan Chase & Co, say that the level could still be reached this quarter. Wells Fargo believes the threshold will likely be reached in the second quarter.
The ECB is expected to cut the rate to 2.75% at its next meeting. Meanwhile, the Federal Reserve is expected to keep rates in the 4.25% to 4.5% range, highlighting the growing divergence in their monetary policies.
As reported earlier, Goldman Sachs predicted that the euro exchange rate could fall by 10%, implying a drop below 1 dollar. According to Goldman Sachs, this will happen if Donald Trump introduces large-scale tariffs and reduces domestic taxes after winning the elections.
