The euro has experienced a decline, reaching a low not seen since November 2022, as a result of weakening signals from the eurozone economy and the prospect of a new trade conflict with the United States. The currency's value dropped below $1.04 against the dollar following a survey indicating a decrease in eurozone private sector output. This downturn has been exacerbated by the threat of new US tariffs on European imports, a move that has been looming since the US election, with the euro's value diminishing over three consecutive weeks to $1.041.
The proposed tariffs by the US, including a significant levy on Chinese goods and a 10% to 20% tariff on products from other countries, could render European exports to the US less competitive, potentially hindering economic growth within the eurozone. Analysts, including Deutsche Bank's George Saravelos, suggest that the market has yet to fully account for the possible economic policies of the US administration, with only 30% of the potential impact currently reflected in financial markets.
Recent data revealed a contraction in eurozone business activity, leading to speculation about aggressive interest rate cuts by the European Central Bank (ECB). Investors are now anticipating a possible 50-basis point rate reduction at the ECB's December meeting. The economic outlook for key eurozone countries, such as Germany and France, remains uncertain, with predictions of stagnant growth and economic slowdowns, respectively.
The appointment of Scott Bessent as Treasury Secretary in the US could offer some stability to the euro, given his market-friendly stance and preference for gradually implemented tariffs. However, the broader expectation of new US trade tariffs and their inflationary effect suggests a scenario where the US Federal Reserve maintains high interest rates to counter inflation, while the ECB may significantly lower borrowing costs to mitigate recession risks in the eurozone.
Analysts, including those from ABN Amro, forecast a divergence in monetary policy between the Fed and ECB, potentially leading to the euro reaching parity with the dollar by 2025 due to increased US import tariffs and their impact on global trade dynamics.
Source: The Guardian