What a strengthening US dollar means for European currencies
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Market watchers expect the bloc’s main currencies to weaken further in 2025 amid the inauguration of US President-elect Donald Trump and continued economic uncertainty, according to analysts.
The US dollar index – which measures the dollar against a basket of rivals – hit its highest level in more than two years on Monday. hotter than expected jobs report left the US last week.
The dollar index was down 0.3% at 109.59 at 6:29 a.m. London time on Tuesday. A day earlier, it rose to 110, the highest price since November 2022.
As the dollar rose, European currencies fell to multi-year lows. The euro It was down 0.4% at $1.0199 by 12:50 London time on Monday, its lowest against the dollar since August 2022. Little had changed by Tuesday morning.
Meanwhile, British pound – had already been under pressure in recent weeks rising government borrowing costs and concerns about the U.K. economy — fell 0.8% to $1.2125 in Monday’s trade, the lowest since early 2023. Sterling was little changed at 7:00 a.m. London time on Tuesday.
Bartosz Sawicki, market analyst at Conotoxia, said the US dollar is likely to continue rising after President-elect Donald Trump takes office again, while European currencies struggle to gain momentum.
“I see a high probability that the markets will behave as we saw during the first presidency of Donald Trump – sharp, volatile movements, but without any strong trend, so the US dollar will remain strong in the short term,” he said. he said.
Sawicki predicts that the dollar, in particular, may trend lower in the long term Expectations of big interest rate cuts from the Federal Reserve are fading. However, he noted that this does not guarantee good news for European currencies.
“The next few quarters will be challenging for both the euro and sterling, which will fail to attract investors and capital inflows as they are highly affected by the prospect of trade wars and uncertainty,” he said.
“We see the euro trading at $1.05 at the end of the year and (the British pound) at $1.25 at the end of the year. So there is no real respite for European currencies.”
Winners and losers
George Saravelos, global head of FX research at Deutsche Bank, said in a note to clients on Monday that both the euro and sterling fell.
His team at Deutsche Bank is forecasting a range of $0.95 to $1.05 for the euro this year, with potential new tariffs from Trump also a risk factor.
“Risks have peaked with prices pointing further towards cuts given the weakening Bank of England data flow,” Saravelos said of the British pound on Monday. “The outlook for foreign flows is weak with rising energy prices and continued weak portfolio flows and the (foreign direct investment) picture … There is a risk of a reversal of the (sterling) hot money-carrying currency flows that supported last year.”
But for a European currency Saravelos’ outlook was positive.
“In Switzerland, we are devaluing the franc,” he said in a note on Monday. “We see SNB (Swiss National Bank) easing continuing, but the zero lower bound will soon be hit, the pace of easing relative to the rest of the world will have to slow.”
He added that Swiss franc was trading in the middle of its five-year range, and the incoming US administration was “probably less receptive to currency intervention”. In 2020, under then-President Trump, the United States accused Switzerland of deliberately devaluing its currency against the dollar. the country’s officials refused.
“It is unlikely that the SNB will allow it to dominate by aggressively pushing back on the franc’s strength,” Saravelos said on Monday.
Alex King, former FX trader and founder of a personal finance platform Generation moneyHe told CNBC that the increase in the value of the dollar affected a number of European economies.
The UK, for example, could struggle with new price hikes, he said.
“The strength of the US dollar makes energy imports more expensive as the UK is a net energy importer, including US LNG and oil imports,” he explained in emailed comments. “This could lead to higher inflation in the coming months, adding to existing inflationary concerns about future US tariffs.”
King suggested this could leave the UK economy in a precarious position as the Bank of England has “little room to maneuver to moderate rising inflation”. rising government borrowing costs, sticky inflation and salary increase.
“On the other hand, the UK is running a trade surplus with the US, so that’s potentially good news for UK exporters whose products are relatively cheaper for US importers,” he said.
Likewise, Germany has become a significant importer of U.S. LNG in recent years, King added, so a weaker euro could drive up energy costs, with the country’s manufacturing sector the hardest hit.
“Many German manufacturers have been struggling with high energy costs for some time, so any increase could potentially be devastating,” he said.
As for the potential winner in Europe, King said Norway could reap some rewards from a strong dollar.
The Norwegian krone was up about 0.2% at 7:20 a.m. London time on Tuesday.
“Norway, a small European player by size, is poised to benefit from a strengthening US dollar as a major oil exporter,” King noted. “Norway’s income will increase with its main export denominated in dollars. At the same time, Norway’s huge sovereign wealth fund has significant exposure to dollar-denominated assets, so it should see value increase.”
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