Since the euro's inception, achieving parity in trade with the dollar has been extremely rare.

The last time this occurred was in 2022, when the Russia-Ukraine conflict triggered an energy crisis in Europe, intensifying concerns about economic recession, leading to the euro to dollar exchange rate falling to its lowest level in nearly twenty years, that is 1:1.

As 2024 draws to a close, due to factors such as Trump's tariffs, sluggish eurozone economic performance, and a strengthening dollar, market analysts are once again seeing the possibility of the euro being on par with the dollar.

If the euro exchange rate falls to parity, it will trigger a series of chain reactions. Some analysts believe that, besides impacting financial markets, it will exacerbate political instability in the European region. At the same time, while a depreciation of the euro may temporarily stimulate exports, it faces the risk of rising trade protectionism and could lead to increased inflationary pressures, posing challenges for the European Central Bank's monetary policy.

Why is the euro declining?

Europe is one of the regions most susceptible to tariff shocks globally. As the largest market for EU exports, if Trump were to impose tariffs on EU products after taking office, it would worsen the already weak European economy. From autos to chemicals to luxury goods, a wide range of EU export products would face tariff barriers.

At the same time, the eurozone's sluggish growth, ultra-low interest rates, and political turmoil in major economies such as France and Germany have intensified uncertainty in the European economy. These factors combined make it difficult for the European economy to escape its predicament.

In addition, the strengthening dollar has also exacerbated the weakness of the euro. Due to market expectations that the Trump administration's policies will stimulate economic growth and corporate profits in the usa, the demand for dollar-denominated assets has been increasing. So far this year, usa assets have outperformed the large cap, putting pressure on other major currencies.

After the usa election, at least 10 investment banks expect the euro to weaken, with some analysts even predicting it will fall below the 1:1 threshold by 2025.

Currently, market views on the future trend of the euro to usd exchange rates vary. The uncertainty of Trump’s policies and the potential countermeasures that europe may take will affect the fluctuations of the exchange rates.

Euro parity turbulence: billions in assets under pressure, populism on the rise, inflation reignited.

The euro exchange rate touching the psychological level of parity has significant implications for both investors and policymakers. The intense fluctuations in the euro exchange rates in the short term are backed by immense pressure from billions of euros in options trading.

Some analyses suggest that although the possibility of exiting the eurozone is minimal, a drop in the exchange rate to parity could encourage populist politicians against the single currency to become more radical. For example, Germany's Alternative für Deutschland party has already begun preparing relevant campaign activities, calling for Germany to exit the eu and the eurozone.

Currency depreciation is usually seen as a tool to stimulate economic growth because it enhances the competitiveness of export commodities. However, if the usa imposes tariffs on these goods, it will offset some of the positive effects.

At the same time, a weaker euro leads to increased costs for imported raw materials, which may reignite inflation. This will undoubtedly put pressure on the european central bank, which is committed to controlling inflation.

Isabel Schnabel, a member of the European Central Bank's Executive Board, warned that a "sharp depreciation" of the euro's exchange rate will affect inflation.

It is important to note that exchange rates are not the primary policy objective of the European Central Bank. The central bank will not set a fixed strong or weak level for the euro, but will influence the exchange rate through adjustments in interest rates and other measures. While exchange rate fluctuations will be taken into consideration for interest rate decisions, direct intervention by the European Central Bank in the forex market to support the euro is very rare.

So far, the central bank has only intervened a few times, in 2000 to support the euro and in 2011 when participating in G7 coordinated actions to weaken the yen.