Euro Faces Dollar Challenge Amid Tariffs and Geopolitics

The euro, now trading below $1.03 as of January 10, is hovering near its weakest level against the greenback in over two years. It could slip below parity with the dollar by early 2025. The currency faces mounting pressure from renewed tariff threats under Donald Trump’s administration, diverging monetary policies, and geopolitical uncertainties.

Trump’s proposed tariffs, including a 60% hike on Chinese imports and up to 20% on European goods, directly threaten key EU exports like vehicles and chemicals. With EU goods exports to the U.S. totaling€502.3 billion in 2023, any decline in trade competitiveness could severely impact demand for the euro.

Monetary policy divergence is compounding the euro’s struggles. U.S. tax cuts and tariffs are expected to fuel inflation, prompting the Federal Reserve to maintain higher interest rates. In contrast, Europe’s lower growth prospects may push the ECB toward easing. 

Analysts predict this divergence could lower the euro by 3% under moderate scenarios and as much as 10% with full tariff implementation, driving capital outflows into higher-yielding dollar assets.

What Does This Mean for Me?

Geopolitical tensions further cloud the euro’s outlook. Trump’s push for NATO members to allocate 5% of GDP to defense spending, coupled with uncertainty over U.S. support for Ukraine, is unsettling Europe’s stability. Meanwhile, energy remains a lingering vulnerability, with the region still reliant on expensive LNG imports that boost dollar demand.

Together, these dynamics put the euro in jeopardy. With markets bracing for policy shifts, the likelihood of the euro testing or breaking parity with the dollar by mid-2025 remains significant.