Economists broadly agree that a Trump victory in the US elections would be likely to weaken the euro against the dollar. The single currency has already slid more than 2% in the month leading up to the vote, as chances of a Trump win have increased.
Some analysts suggest that, should Republicans secure full control of Congress, a so-called 'red sweep', the euro could even fall to parity or below against the dollar.
However, historical precedent from Trump's 2016-2020 presidency suggests the opposite occurred, at least during his first year in office.
Here's what investors might expect this time around.
Why a Trump victory could pressure the euro
One primary mechanism pushing the euro down would be Trump's proposed tariffs on foreign goods. Trump has indicated he may impose a 60% tariff on Chinese imports and a 10% tariff on goods from other countries.
Economists have warned that such tariffs would be likely to increase inflation in the United States, as the higher cost of imported goods would lead many companies to pass on these expenses to consumers. The effect may be further compounded if US producers, shielded from foreign competition, increase their own prices.
Higher inflation in the US could prompt a more hawkish response from the Federal Reserve. The central bank, mandated to curb inflation, may be forced to raise interest rates to counteract price pressures stemming from tariffs.
Meanwhile, Europe, whose exports would suffer from the US protectionist stance, might experience a slowdown in economic growth, which could prompt the European Central Bank (ECB) to consider looser monetary policy to support its economy.
If the Federal Reserve hikes rates while the ECB eases, the interest rate differential could drive the dollar up sharply against the euro, as investors flock to higher-yielding US assets.
This divergence in monetary policy is often a key driver of exchange rate shifts, and in this scenario, it could push the euro closer to parity with the dollar.
In addition to tariffs, a renewed Trump administration could pursue tighter immigration policies. Reduced immigration would likely limit the availability of labour in the US, putting upward pressure on wages as firms compete for workers.
Higher wages, in turn, could contribute to inflation, reinforcing the need for tighter monetary policy by the Federal Reserve. This scenario could add another layer of support to the dollar while further disadvantaging the euro.
Analysts' forecasts for euro-dollar exchange rate if Trump wins
Luca Santos, a foreign exchange analyst at ACY Securities, noted: "A potential Trump victory could bring policy shifts aimed at boosting US economic growth through domestic spending and a more protectionist trade stance. Such a scenario often leads to a stronger dollar, as investors bet on a favourable economic climate for US assets."
Georgette Boele, Senior FX & Precious Metals Strategist at ABN Amro, highlighted the impact of Trump's trade policies on the dollar's performance, noting that "markets have priced in fewer rate cuts for the Fed this year following strong US data, but more for the ECB."
According to Boele, ongoing changes in polling ahead of the election have heightened volatility in the dollar, with Trump's odds influencing short-term market movements.
BBVA strategists Alejandro Cuadrado and Roberto Cobo have predicted that, if Trump wins, especially with full Republican control of Congress, the euro could drop below $1.08. On the other hand, they foresee a weaker dollar should Kamala Harris win the election.
Goldman Sachs issued one of the most bearish forecasts for the euro. Analyst Michael Cahill projects that "diverging monetary policy implications for the US and Europe could weaken the euro by about 3%".
However, should Trump introduce broad-based tariffs and domestic tax cuts, Cahill suggests the euro could fall even further, potentially dropping by 10%, which would bring the currency below parity with the dollar.
Trump's 2016-2020 presidency didn't lead to a euro decline
Looking back, Trump's 2016 victory initially strengthened the dollar, with the euro declining from $1.10 in October to $1.0340 by early 2017, but as Stefan Gerlach, Chief Economist EFG Bank AG, recently wrote, the US election prompted a significant increase in US interest rates as markets anticipated Trump's economic policies would stimulate growth and inflation.
Consequently, the yield gap between US and German bonds widened, exerting downward pressure on the euro in the months following the Trump win.
However, "from January to September 2017, the process worked in reverse as the interest rate differential in favour of the US contracted to 1.85% and the dollar depreciated to $1.19 per euro".
Two factors played a key role here: the dollar reversed course as Trump's economic programme faced delays and eurozone growth improved. Political stability in Europe, following pro-EU election victories in France and the Netherlands, represented a key boost for the euro.
From February 2018 to 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.
In the wake of the Covid-19 pandemic, however, the euro rebounded as the Fed adopted extremely loose monetary policies, climbing to $1.18 by November 2020, when Joe Biden won the US election.
Overall, from November 2016 to November 2020 - Trump's presidential term - the euro appreciated from $1.10 to $1.18 against the dollar.
What could be different this time?
While a slide of the euro to dollar parity is far from guaranteed, several factors under a Trump administration could heighten the risk, particularly for investors closely monitoring the euro-dollar exchange rate.
A mix of renewed US protectionism, rising inflation, and diverging central bank policies could all play pivotal roles.
With inflation already a major concern in the US, any additional pressures from tariffs or stricter immigration policies could prompt a rapid response from the Federal Reserve, is likely in the form of tighter monetary policy.
The ECB, however, faces a different economic outlook, as Europe's growth remains more vulnerable to external shocks. If US tariffs disproportionately impact European exports, the ECB could respond with further easing, which would widen the interest rate differential and add to downward pressure on the euro.
EURONEWS