Peeling Away the Dollar's Edge: Why Parity with the Euro Could Potentially be Achieved, courtesy of Protectionist US Policies
Kai Johannsen's Ponderings from Frankfurt
U.S. Dollar Forecast to Thrive Under Trump's Presidency
Brace yourselves, Oh Euro enthusiasts! The upcoming year may see the Euro tussling against the mighty Dollar, with 2025 tipped to be a Dollar-friendly era. But don't sweat it just yet, as two key factors are set to beef up the Dollar--a strengthening US economic cycle under the Trump era and the interest rate differential between the US and Europe. And if the stars align just right, we might even see the Dollar trading at parity with the Euro... but that's a long shot.
As it stands, the forecasters haven't exactly predicted parity between the US Dollar (USD) and Euro (EUR) for 2025. HSBC, for one, revised its end-2025 forecast, bumping it up to 1.15 from 1.04, thanks to the USD's vulnerability and looming stagflation risks[5]. But, let's not throw in the towel just yet because a couple of wild cards could flip the game on its head.
So, what are these game-changers? Here's the lowdown:
- US's Achilles Heel: HSBC points to the dollar's failure to thrive amid risk-off sentiment, signaling a shift in its outlook. If the US economy faces weak survey data and confronts stagflation fears (inflation bloom amid slow growth), those real yields could take a dive and dampen the dollar's appeal[5][4].
- Debt Cometh Again: TheUS might have to deal with another whopping wave of debt refinancing in 2025[2]. This could put pressure on Treasury yields, increase fiscal deficits, and compromise the dollar's strength.
- Technical Analysis Reigns: If chartists have their way, a 'cup-and-handle' pattern spotted on EUR/USD charts suggests we might witness a burst of bullish energy, potentially surging up to the 2024 high of 1.1214[3].
- Politics and Trade: Geopolitical shenanigans like tariff policies and elections might stir up the waters, but recent forecasts haven't pegged them to the parity scenario we're discussing[4][2].
Now, reaching parity (1.00) is a farfetched idea if we're strictly talking about current projections. For it to happen, we need a couple of significant twists:
- US Growth Steals the Show: If the US economy surprises us with blazing growth, the prospect of Fed tightening goes up, potentially deskilling the Euro.
- Eurozone's Crisis Dejavu: Renewed debt fiascos and energy quakes in Europe could paint the Euro into a downward spiral.
- Global War Looms: Escalating global conflicts and the subsequent dollar-safe-haven demand could skew the odds in the Dollar's favor.
In light of the anticipated economic conditions, the Euro could potentially attain parity with the USD by 2025, if the US economy faces stagflation risks, undergoes another wave of debt refinancing, exhibits a 'cup-and-handle' pattern on EUR/USD charts, or encounters significant geopolitical instability. However, reaching a USD-EUR parity of 1.00 would require the US to experience rapid economic growth, the Eurozone to face renewed debt crises or energy crises, or global conflicts to escalate, leading to increased demand for the US Dollar as a safe haven.
