Prime Highlights:
The euro fell to its lowest level against the US dollar in over two years, reaching mid-1.02, as concerns over the Eurozone’s economy and political instability persist.
The euro has depreciated by 9% in the past three months, and it has dropped from a recent high of over 1.12 as recently as last September 2024.
The US dollar’s rise, fueled by Donald Trump’s political influence and proposed tariffs, has intensified the euro’s decline.
Key Background:
The euro has fallen to a two-year low against the US dollar, driven by mounting concerns over the Eurozone’s economic outlook, growing political instability, and diverging monetary policies between the European Central Bank (ECB) and the Federal Reserve. On January 3, 2025, the euro dropped 0.9% against the US dollar, reaching a low of approximately 1.02, its weakest level since November 2022. This recent decline, which began in early 2024 and has persisted into the new year, reflects ongoing worries about the Eurozone’s economic challenges.
The euro’s decline can be attributed to several key factors. A major one is the sustained strength of the US dollar, which has been bolstered by the political influence of former President Donald Trump, especially regarding his proposed tariffs on imports from countries like China, Canada, and Mexico. This has raised concerns about higher costs for European manufacturers, particularly in sectors such as automotive production.
The economic landscape in the Eurozone is also increasingly bleak. Political instability in key countries like France and Germany, exacerbated by the rise of far-right politics and fractured political coalitions, further undermines confidence. France recently downgraded its 2025 economic growth forecast from 1.2% to 0.9%, while Germany’s manufacturing sector remains in contraction. Additionally, the loss of a major Russian gas transit contract has forced Europe to rely on more expensive heating methods, placing additional strain on the region’s economy.
Another contributing factor to the euro’s weakness is the ECB’s softening monetary policy. Analysts anticipate that the ECB may accelerate its rate-cut cycle in 2025, while the Federal Reserve is expected to maintain a more hawkish stance, widening the policy gap between the two regions. These challenges, coupled with the Eurozone’s ongoing economic difficulties, have led analysts to predict that the euro-dollar exchange rate could reach parity by the end of 2025.
