The euro, hovering near its weakest point in over two years, is grappling with threats from Trump’s trade policies, diverging monetary strategies, and global uncertainties. Analysts warn the euro could reach parity with the dollar by early 2025.

How Close is the Euro to Parity?

On January 10, the euro dipped below $1.03, its lowest level since October 2022, as robust U.S. job growth in December boosted the dollar. The currency now teeters near parity, a psychological milestone. The last time the euro dropped below parity was in summer 2022, sinking as low as $0.95 in September.

That decline was fueled by aggressive Federal Reserve rate hikes, the European Central Bank’s (ECB) delayed responses, and a European natural gas crisis. Today, similar factors could drag the euro below parity again, as Trump’s economic policies begin to take hold.

Since Trump’s election in November 2024, the euro has weakened significantly. His plans include steep tariffs—up to 60% on Chinese goods and 10-20% on imports from Europe—alongside U.S. tax cuts. Geopolitical strains, including demands for increased NATO spending, further complicate the euro’s outlook.

These dynamics could affect the euro through three key channels.

Tariffs Erode Europe’s Trade Competitiveness

Trump’s tariff plans pose a direct threat to European trade, particularly in industries like automotive and pharmaceuticals.

The European Union exported €502.3 billion in goods to the U.S. in 2023, representing 20% of its non-EU exports. Machinery, vehicles (€207.6 billion), and chemicals (€137.4 billion) dominate this trade.

Higher tariffs would make European goods less competitive in the U.S. market, reducing demand for the euro.

“FX markets often struggle to fully price tariff risks in advance,” said Goldman Sachs analyst Kamakshya Trivedi, hinting at potential dollar gains as policies take effect.

Diverging Monetary Policies Widen the Gap

Economic disparities between the U.S. and Europe are likely to widen under Trump’s administration.

Tariffs and tax cuts could stoke U.S. inflation while suppressing European growth. This divergence may prompt the Federal Reserve to maintain higher interest rates while pressuring the ECB to ease monetary conditions to stimulate demand.

Goldman Sachs predicts that diverging policies could push the euro 3% lower, with losses potentially reaching 10% if Trump’s policies are fully implemented. Such scenarios would drive capital away from euro-denominated assets toward higher-yielding dollar investments.

Geopolitical Tensions and Energy Challenges Persist

Geopolitical uncertainties and energy policies further weigh on the euro’s prospects.

Trump’s calls for NATO members to increase defense spending to 5% of GDP have strained transatlantic relations. Doubts over U.S. support for Ukraine add to the unease.

Energy remains a critical vulnerability. The European natural gas crisis in 2022 forced the EU to rely on costly LNG imports from the U.S., increasing dollar demand. A repeat of such conditions, combined with Trump’s geopolitical moves, could exert further pressure on the euro.

Outlook for the Euro: A Fragile Path Forward

The euro’s trajectory will depend on the interplay of tariffs, monetary policies, and geopolitical developments.

While markets await clarity on Trump’s economic plans and guidance from central banks, the risk of the euro testing parity with the dollar in early 2025 looms large.

Europe’s ability to counter U.S. policy shifts will be crucial, but for now, the euro’s outlook appears increasingly precarious.