Recent developments in the U.S. domestic politics have had significant implications for the most-traded foreign currency pair on the market – EUR/USD.
However, it is also worth noting that Trump’s reelection has been far from the only catalyst for the USD gaining ground over the euro.
In fact, the rise of the USD against the EUR started towards late September, when the exchange rate of EUR/USD was roughly 1.12, which has since fallen almost to 1.05, which is a significant drop for the euro over a 3-month trading period.
Some analysts have also expressed the possibility of parity between the two currencies in the near future.
What has caused the euro to lose so much ground against the U.S. dollar and how could the EUR/USD pair perform in 2025? – We can answer this question by looking at the key factors affecting inflation in the EU and the United States, respectively.
Major EUR headwinds
Those scalping the FX market may have noticed the sheer speed at which the euro fell against the dollar in recent months.
There are several key reasons behind this development, which have been triggered by both the monetary policy of the ECB, as well as the reelection of Donald Trump, which has strengthened the dollar against virtually every currency available on the market.
As for the factors tied to the weakening of the euro, such a development best favors Germany, as it makes German exports more appealing for the global economy and eases the pressure on the manufacturing sector of the German economy, which has been a key issue ever since the Russian invasion of Ukraine started in 2022.
Furthermore, the ECB has stalled on raising interest rates on the euro, which has caused the currency to underperform against the dollar in recent months.
U.S. dollar and Trump’s reelection
Trump’ s economic policy has been largely revolving around the revival of the U.S. manufacturing sector, which means reshoring much of the supply chains spread around China and other East Asian countries.
This means hundreds of thousands of new manufacturing jobs returning to the United States, which is highly likely to be inflationary, which is further compounded by the demographic crisis looming over the global economy in the long run, which will make labor more expensive and skilled professionals much more in demand.
These factors combined also increase the likelihood of interest rate hikes in the coming years, which directly affect the strength of the U.S. dollar, as investors pour more of their capital into the U.S. bond market.
Balancing the trade deficit of the United States and eradicating government waste in key areas will also provide the country with a larger borrowing capacity for strategic economic areas, such as manufacturing, greentech and artificial intelligence.
Predictions for 2025
While talks of Trump targeting a weakened dollar to boost manufacturing exports in the United States, experts are skeptical of the proposition and do not see the Trump administration taking this route in the long run.
Conversely, the inflationary pressures caused by reshoring manufacturing jobs could cause inflation to spike in the U.S. – leading to a more hawkish Federal Reserve and a stronger USD.
Therefore, the notion that the euro and the dollar could soon reach parity could be closer to reality than some analysts realize.
Whether the U.S. dollar will be able to overtake the euro in the coming years is debatable, but certain factors could play into such a scenario – the rapidly aging population of the European Union and further strengthening of the USD being two key components.
2025 specifically could see the EUR/USD pair reach parity, as the mounting pressures on German manufacturing further the country’s economic woes, while the U.S. economy continues to gain some ground.
Whether we will see an interest rate hike in 2025 is debatable, but U.S. fiscal policy is likely to outweigh the monetary policy over the course of the year.
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