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The euro, hovering near its weakest level in over two years, faces growing challenges from Trump’s tariff plans, diverging monetary policies, and geopolitical tensions. Analysts warn that parity with the dollar could become a reality as early as 2025.

Is Parity with the Dollar on the Horizon?

The euro fell below $1.03 on January 10, marking its lowest point since October 2022. Strong US employment growth in December boosted the dollar, as markets anticipate tighter Federal Reserve policies. With these developments, the euro inches closer to parity—a psychological threshold last breached in summer 2022, when it plunged to $0.95 by September.

The currency’s steep decline in 2022 was driven by aggressive Federal Reserve rate hikes, a delayed European Central Bank (ECB) response, and Europe’s natural gas crisis. A similar mix of pressures could push the euro below parity again in early 2025.

Since Donald Trump’s election victory in November 2024, the euro has weakened significantly. However, the full effects of his administration’s economic policies may not yet be fully realized.

Key policies include proposed tariff increases—up to 60% on Chinese goods and 10–20% on European imports—alongside corporate and individual tax cuts.

Increased demands for European NATO spending and Trump’s scepticism toward transatlantic alliances have added to geopolitical uncertainty. These dynamics threaten the euro through three primary channels.

Tariffs Threaten European Trade Competitiveness

Higher US tariffs on European goods, especially automotive and pharmaceutical exports, could undermine Europe’s trade position.

The EU exported €502.3 billion in goods to the US in 2023, representing 20% of its total non-EU exports. Machinery, vehicles (€207.6 billion), and chemicals (€137.4 billion) comprised the majority.

If tariffs rise, European products may become less competitive in US markets, dampening demand for the euro. This adjustment could exert prolonged downward pressure on the currency.

Goldman Sachs analyst Kamakshya Trivedi noted that “FX markets struggle to fully price tariff risks ahead of time,” suggesting the dollar may strengthen further once these policies take effect.

Diverging Central Bank Policies Add Pressure

Trade challenges are compounded by contrasting monetary policy paths between the US and Europe.

Tariffs and tax cuts could fuel inflation in the US while curbing growth in Europe. The Federal Reserve may maintain higher interest rates, while the ECB could face pressure to ease monetary policy to boost demand.

Goldman Sachs estimates that diverging monetary stances could push the euro 3% lower under baseline conditions. If tariffs and tax cuts are fully enacted, the drop could reach 10%.

This scenario could trigger significant capital outflows from euro-denominated assets into the dollar, amplifying the euro’s decline.

Geopolitical Risks and Energy Challenges

Geopolitical instability and energy policies further threaten the euro. Trump’s calls for NATO members to raise defense spending to 5% of GDP and his wavering support for Ukraine have unsettled transatlantic relations.

Energy issues remain a critical concern. The 2022 European natural gas crisis forced the EU to rely on costly US LNG imports, increasing demand for dollars. A repeat of such conditions, combined with geopolitical uncertainties, could heavily impact the euro.

What’s Next for the Euro?

The combination of trade tariffs, monetary policy divergence, and geopolitical tensions places the euro in a precarious position.

While markets await clarity on Trump’s policy direction and central bank responses, the euro could test parity with the dollar by mid-2025.

The extent of US policy shifts and Europe’s ability to mitigate these effects will ultimately determine the euro’s trajectory. For now, the single currency faces an increasingly fragile outlook.