The US dollar recorded a surge following the presidential elections. The US dollar index (DXY) rose about 2.50% and the EUR/USD rate is fell from levels of around 1.08 to current levels of just above 1.05. The dollar’s surge is most evident against the euro and the Chinese renminbi, given their respective export shares to the United States. He underlines it Union Bancaire Privée (UBP) in the analysis edited by Peter KinsellaGlobal Head of Forex Strategy.
Euro-dollar exchange rate, UBP analysis
The data – explains the expert – indicate that the countries’ currencies cWith extensive exposure to the United States for trade they are affected by negative growth betas. The average two-year loss for the euro has been in the 4% range, while most other G10 currencies have seen annualized losses of between 2% and 6% against the USD. This data is consistent with what the models predicted. Similar effects are already evident this time, and in some cases they are already strongly discounted swithout it having been announced no duties.
The greatest uncertainty for investors it is represented by Trump’s opinionsul dollar. US presidents typically support a strong dollar. Trump and his advisors have made no secret of their desire to see weaker dollar exchange rates. However, achieving this goal appears to be inconsistent with Trump’s fiscal policy.
The last time the EUR/USD fell below par (1.00) was in 2022. It is important to remember that this drop in the EUR/USD rate below parity occurred due to very specific factors:
- The US dollar benefited from a flight to quality and safe haven flows due to the war in Ukraine.
- The euro underperformed due to its geographical proximity to the conflict zone and the resulting large fiscal costs.
- Oil and gas prices increased in late 2021 and into 2022. The sharp rise in energy prices had a much greater impact on the euro than on the dollar, due to the eurozone’s high energy needs. This has had a significant impact on the eurozone’s terms of trade (ToT), which have significantly deteriorated in 2022.
- The huge increase of energy prices traded internationally has caused a rapid and substantial deterioration in current accountsi of the eurozonewhich went from a large surplus to a modest deficit – in a very short period of time. It was a shift of 400 billion dollars in current accounts of the eurozone.
What impacts from the Trump Presidency
Historically, the decline of the euro towards and below parity occurred during a strong balance of payments shock. This does not apply to the current context. Energy prices are now below pre-war levels and the current account surplus has returned to levels of around $430 billion. A possible resolution of the war between Russia and Ukraine should lead to a decline in energy prices (at the margin), benefiting the euro. The general consensus is that oil prices will tend to decline in 2025, due to abundant supply and limited growth in Asian demand. It follows that, if anything, the eurozone’s current account surplus could increase further in the coming months and quarters. The consensus view that the EUR/USD rate will move towards (and below) parity is probably wrong because there are no conditions for a substantial break in rilow.
EU-US swap spreads to two years have widened by about 40 basis points since the US election, reflecting the consensus view that Trump’s second presidency will be inflationary. Short-term euro spreads tightened in anticipation of tariff-related negative growth betas. Political developments in Germany have not helped the euro, as they imply a lack of any fiscal stimulus until at least the second quarter of 2025. Markets seem to believe that in the meantime the ECB will have quite a challenge to face in maintaining or improving its performance. eurozone growth.
The overnights index swap aThey currently show the expectation that the ECB will reduce its deposit rate to levels around 1.75% by September 2025. We believe this forecast is likely overestimated compared to the ECB’s willingness and ability to reduce rates. Inflation could easily rise from the second quarter of 2025. Eurozone wage growth is likely to stabilize and even increase in 2025, thus limiting the ECB’s ability to cut rates below 2.50% . It follows that there is ample room for short-term spreads to increase by around 50 bps – 75 bps from current levels.
Also the consensus opinion that the Trump presidency would lead to more inflationary outcomes is questionable. The US CPI averaged 1.9% between 2018 and 2019, when Trump introduced the first and second rounds of tariffs. Trump was elected to reduce the cost of living for US consumers, and it is unclear why he would therefore pursue an explicitly inflationary agenda. The impact of the tariffs alone is unlikely to add more than 0.5% to US core inflation dynamics, and even then the results will not be seen in the data until 2026. This means that the “Trump trade ” is already priced with an excess of optimism.
and German political crisis
The German elections on 23 February 2025 “do not lead us to expect any new fiscal impulse in the eurozone in the short term, which will limit the rise of the euro. In the medium term, we assume that the new governing coalition will change the German constitutional debt brake, meaning that investors should expect large bond issuance that will put further upward pressure on long-term German yields, thus supporting the ‘euro”.
In the meantime, “we should expect the US dollarA will continue to trade at its current high levels until markets have more certainty about the size of the tariffs and the resulting impact on the exchange rate. In the medium to long term, the evolution of the United States’ “twin deficits” will eventually weigh on the dollar. However, it is unlikely that these effects will manifest themselves in the coming months,” concludes the expert
