The Potential Impact of a Trump Presidency on the Euro
As the prospect of a Trump presidency looms, the significant decline of the euro has prompted economists to predict that a Trump victory in the upcoming US elections could further weaken the euro against the dollar. Some analysts have suggested that if the Republicans achieve a comprehensive ‘red sweep’ by securing full control of Congress, the euro could even plummet to parity or below against the dollar. However, historical analysis from Trump’s previous presidency (2016-2020) indicates that the initial response was quite the opposite, at least during the first year in office. Below, we explore what investors might anticipate this time around.
How a Trump Victory Could Pressure the Euro
A critical factor that could drive the euro down is Trump’s proposed tariffs on foreign goods. He has hinted at implementing a 60% tariff on Chinese imports and a 10% tariff on products from other nations. Economists have cautioned that such tariffs are likely to spur inflation in the United States, as the increased costs of imported goods could compel many companies to pass these expenses onto consumers. This effect may be exacerbated if domestic producers, shielded from international competition, also raise their prices.
Higher inflation in the US could trigger a more aggressive stance from the Federal Reserve. The central bank, tasked with curbing inflation, might be forced to elevate interest rates to counteract price pressures stemming from the tariffs. On the other hand, Europe, which would likely suffer from the US’s protectionist policies, could experience a slowdown in economic growth, prompting the European Central Bank (ECB) to consider looser monetary policies to bolster its economy. Should the Federal Reserve raise rates while the ECB opts for easing, the interest rate differential could significantly boost the dollar against the euro, as investors flock to higher-yielding US assets. This divergence in monetary policy is frequently a key driver of exchange rate shifts, potentially nudging the euro closer to parity with the dollar.
In addition to tariffs, a renewed Trump administration may implement stricter immigration policies. Reduced immigration would likely constrain the labor supply in the US, leading to upward pressure on wages as firms compete for available workers. Higher wages could, in turn, contribute to inflation, reinforcing the need for a tighter monetary policy from the Federal Reserve. This scenario could further support the dollar while disadvantaging the euro.
Analysts’ Predictions for the Euro-Dollar Exchange Rate if Trump Wins
Luca Santos, a foreign exchange analyst at ACY Securities, remarked, “A potential Trump victory could instigate policy shifts aimed at stimulating US economic growth through domestic spending and a more protectionist trade approach. Such a scenario typically leads to a stronger dollar, as investors anticipate a favorable economic climate for US assets.” Georgette Boele, Senior FX & Precious Metals Strategist at ABN Amro, pointed out the implications of Trump’s trade policies on the dollar’s performance, noting, “Markets have adjusted expectations for fewer rate cuts from the Fed this year, following robust US economic data, while more cuts are anticipated for the ECB.” Boele also highlighted that changing polling dynamics ahead of the election have increased volatility in the dollar, with Trump’s chances influencing short-term market movements.
BBVA strategists Alejandro Cuadrado and Roberto Cobo have predicted that, if Trump wins, particularly with full Republican control of Congress, the euro could tumble below $1.08. Conversely, they anticipate a weaker dollar should Kamala Harris secure victory. Goldman Sachs has issued one of the most pessimistic forecasts for the euro. Analyst Michael Cahill projects that “diverging monetary policy implications for the US and Europe could lead to a 3% depreciation of the euro.” However, if Trump enacts broad-based tariffs coupled with domestic tax cuts, Cahill suggests the euro could plummet even further, potentially falling by 10%, which would position the currency below parity with the dollar.
The Historical Context: Trump’s 2016-2020 Presidency
Reflecting on Trump’s 2016 victory, the initial response was a strengthening of the dollar, with the euro declining from $1.10 in October to $1.0340 by early 2017. As Stefan Gerlach, Chief Economist at EFG Bank AG, recently noted, the US election triggered a notable rise in US interest rates as markets anticipated that Trump’s economic policies would foster growth and inflation. Consequently, the yield gap between US and German bonds widened, placing downward pressure on the euro in the months following Trump’s victory. However, “from January to September 2017, the trend reversed, as the interest rate differential favoring the US contracted to 1.85%, resulting in the dollar depreciating to $1.19 per euro.” Two significant factors contributed to this shift: the dollar’s reversal stemmed from delays in Trump’s economic agenda and improved growth prospects in the eurozone. Political stability in Europe, following pro-EU election victories in France and the Netherlands, was a pivotal boost for the euro. Between February 2018 and March 2020, the euro fell from $1.25 to $1.06, as eurozone inflation consistently remained below the 2% target while the Federal Reserve raised interest rates. However, following the Covid-19 pandemic, the euro rebounded due to the Fed’s adoption of extremely loose monetary policies, climbing to $1.18 by November 2020, coinciding with Joe Biden’s electoral victory. Overall, from November 2016 to November 2020—Trump’s presidential term—the euro appreciated from $1.10 to $1.18 against the dollar.
Potential Differences in the Current Landscape
While a drop of the euro to dollar parity is not a certainty, several factors under a Trump administration could heighten this risk, especially for investors closely monitoring the euro-dollar exchange rate. A blend of renewed US protectionism, escalating inflation, and diverging central bank policies could all play crucial roles. With inflation already a pressing issue in the US, any additional pressures from tariffs or stricter immigration policies could compel the Federal Reserve to respond swiftly, likely through tighter monetary policy. Meanwhile, the ECB faces a contrasting economic outlook, as Europe’s growth remains more susceptible to external shocks. If US tariffs disproportionately affect European exports, the ECB could respond with further easing, widening the interest rate differential and adding to the downward pressure on the euro.
