Published on: 2025-02-13
The euro has barely moved so fat in 2025. But near one-third of currency strategists polled by Reuters are now expecting it to fall to parity with the dollar or below versus only one-fifth last month.
The median survey view was for the euro to hold steady over the coming three and six months at $1.03, and strengthen about 2% in the second half of the year to $1.05 at the end of January.
However, the dollar's strength could out of steam in Q2 and weaken over the longer run, "but conviction on when this turning point will happen is quite low," said Meera Chandan, co-head global FX strategy at JP Morgan.
An FT report outlined the reasons the American economy will continue to outperform. For Europe, the US has been less affected by the war in Ukraine, owing to its abundant domestic energy supplies.
Apart from aftermath of the war, US labour productivity has grown by 30% since the 2008-09 financial crisis, more than three times the pace in Europe – a wide gap contributing to the "American exceptionalism."
Globally, the top R&D spenders are increasingly concentrated in the technology sector which is dominated by US companies. Europe has showed little sign of this dynamism.
According to Oxford Economics, the level of private investment in the eurozone would be reduced by almost 2% by the end of 2027 as a result of pending tariffs on the bloc.
MAGA 2.0
Donald Trump's threatened trade war is driving a wider wedge between the Fed and the ECB. Powell indicating interest rates will remain on hold given the strong US economy and political uncertainties.
Traders have taken note of the trend, pricing in more cuts outside of the US since the election. They still expect another three to four 25-bp rate cuts from the ECB this year.
"A few years ago, central banks were quite reluctant to move away from the Fed …" said Dario Perkins, economist at TS Lombard. "It's a much clearer policy decoupling now."
With inflation much higher than that in 2018, Trump's tariffs are expected to hit prices more than during his first term. He has targeted nearly every major trading partner of the US within less than a month.
Empirically MAGA causes a one-off inflationary shock on the countries which "take advantage of" the US, but can lead price rises to settle at rates higher than central bankers might like.
European leaders vowed on Tuesday to retaliate after Trump announced that he would raise tariffs on aluminium and steel to 25%. That could be the first of a series of "reciprocal" tariffs.
According to Citi, even if the EU imposed a 10% retaliatory tariff on US non-energy imports, it would have a very small 0.05% upward impact on core consumer prices inflation.
A hard peace deal
Trump said on Sunday he believed he was making progress in its talks to end the war between Russia and Ukraine, but declined to provide details about any communications he had had with Putin.
The US president also wants to meet up to discuss the issue. saudi arabia and the UAE are seen by Russia as possible venues for a summit, Reuters reported earlier this month.
Last year Putin set out his opening terms for an immediate end to the war: Ukraine must drop its NATO ambitions and withdraw its troops from the four regions claimed and mostly controlled by Russia.
Zelenskiy has agreed to supply the US with rare earths and other minerals in return for financially supporting its war effort. That assuages concerns that Washington will abandon Ukraine.
About 40% of Ukraine's metal resources are now under Russian occupation, according to a think tank. That means the US is providing itself with advance payment guarantee by commitment to a ceasefire.
Business confidence in Europe will get a boost if Trump can deliver his promise. Still that is unlikely to happen until the dust settles on the battleground, so European assets shrugged off the news.
Surprisingly Trump suggested Ukraine possibly losing its sovereignty to Russia in the latest interview. The appalling speech underscores uncertainties around the outcome of the war.
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