The year 2025 has begun with shocking news for the currency markets: the euro has registered its first major collapse against the dollarfalling to the $1,022. This is its lowest level in more than two years, which once again puts the dreaded ghost of parity. Indeed, several financial firms already predict that the euro could reach or even fall below parity against the dollar before June 2025. Three of them even project that the European currency could trade below the dollar, with an additional fall of 3.5% still ahead to reach this threshold.
Although in the first days of the week the exchange rate has played a little more in favor of the euro, the value of the European currency continues to be in November 2022 lowstrading around $1,033. Since September 2024, when the euro was exchanged for $1.11has lost more than 7.5% of its value against the US currency.
What is Driving the Fall of the Euro?
The victory of donald trump in the United States presidential elections has profoundly altered global economic and financial expectations. With the market anticipating greater inflation due to the possible trade war with China and Trump’s expansionary fiscal policies, expectations for the monetary policy of the United States Federal Reserve (Fed) They have also been adjusted. This has driven the dollar at higher levels, while the looser monetary policy of the European Central Bank (ECB) continues to pressure the euro.
The market now expects the Fed to continue its restrictive policy, while in the eurozone the ECB is expected to maintain a more flexible approach to supporting growth. In fact, they are currently discounted between one and two interest rate cuts for this year in the eurozone, while the Fed could opt for a more gradual adjustment. These movements also impact the value of currencies.
Parity: What Does the Market Say?
The outlook is uncertain, but several investment firms have already begun to assess the possibility of the euro reaching the parity against the dollar in the first half of 2025. Wells Fargo and Rabobank They are two of the entities that consider that the euro could reach this level before July of next year. Furthermore, as the months progress, more analysts are updating their forecasts downwards, increasing the likelihood that the euro will lose ground against the dollar.
Signatures like Goldhawk Partner and Commonwealth Bank of Australia They even project that the euro could fall below parity, reaching $0.98 in the second quarter of 2025. This outlook has many investors preparing for possible prolonged weakness in the European currency.
The Future of the Euro: Risks and Opportunities
Despite the challenges, the currency market also reflects a significant probability that the euro could fall below parity in the coming months. According to the OIS financial contracts (Overnight Indexed Swaps), the probability that the euro will trade below one dollar reaches 30% by the end of 2025, reinforcing the expectation of greater strength in the greenback.
This panorama of a strong dollar is largely due to a solid economic growth in the United States and the high yields of treasury bonds. Furthermore, the hedge funds (hedge funds) are increasing their bets in favor of parity, which is reflected in the increase in options who anticipate this movement.
The Impact of Monetary Policy
The behavior of the euro is also related to the monetary policy of the ECB, which remains more flexible compared to the Fed. The expectation that the ECB may have to trim types further to stimulate growth in the eurozone adds pressure on the euro. The analyst of Obersea-Chinese Banking, Cristobal Wongpoints out that the risk balance is biased downwards for the euro, especially around the levels of $1.03.
Furthermore, forecasts for eurozone growth are slowing, forcing the ECB to take additional measures to counter the economic slowdown.
A Challenging Context for the Euro
The last major episode in which the euro lost parity with the dollar was at the end of 2022, when the war in ukraine and the European energy crisis deeply affected the eurozone economy. At that time, the euro touched the $0.959. This drop was the result of a increased risk of economic slowdown in Europe and expectations of a restrictive monetary policy in the United States.
What Can Investors Expect?
From the technical point of view, the analyst Joan Cabrero of ecotrader warns that the support at $1.035-$1.04 that the euro had recently maintained has weakened, which opens the door to a possible scenario bassist for the European currency. Cabrero points out that the euro could seek the 2022 lowsagain reaching levels close to $0.95.
On the other hand, although the euro remains under pressure, the dollar has been the strongest currency against other currencies, including the pound sterlinghe japanese yen and the chinese yuan. In fact, the emerging market currencies like him Brazilian real and the mexican peso have been among the most affected, with falls of 11.4% and 6.4%respectively, in the last three months.
Final Reflection: Be accompanied by a Financial Advisor
Fluctuations in the currency market, such as the fall of the euro against the dollar, show how important it is to have a clear picture when making financial decisions. If you are considering investments in currencies or international markets, it is essential to have the advice of a financial expert. A specialized advisor can help you make informed decisions, optimize your investment strategies and manage the risks associated with currency movements. Don’t leave your finances to chance, take control with the right guidance!