Will the Euro Rise? Analyzing the Euro to Dollar Exchange Rate Under Potential Trump Presidency

Economists largely agree that a victory for Donald Trump in the US elections could weaken the euro against the dollar. The euro experienced a depreciation of over 2% against the dollar in the month leading up to the election as Trump’s probability of winning increased.

Some analysts even suggest that if the Republicans were to gain full control of Congress, a scenario often referred to as a “red wave,” the euro could fall to parity with the dollar, or even below.

However, precedents from Trump’s 2016-2020 presidency indicate that, at least during his first year in office, the opposite occurred.

Why a Trump Victory Could Pressure the Euro

One of the primary mechanisms through which Trump could weaken the euro is through the imposition of tariffs on foreign goods. Trump has suggested tariffs of 60% on goods imported from China and 10% on goods from other countries.

Economists warn that such tariffs are highly likely to increase inflation in the United States, as the higher cost of imported goods would compel many companies to pass those expenses on to consumers. The effect could be amplified if US producers, shielded from foreign competition, also raise their prices.

Higher inflation in the US could trigger a more hawkish response from the Federal Reserve. The central bank, tasked with controlling inflation, might be compelled to raise interest rates to counteract the price pressures stemming from tariffs.

Conversely, economic growth in Europe, negatively impacted by US protectionism, could slow down. This situation might lead the European Central Bank (ECB) to consider a looser monetary policy to support the economy.

If the Federal Reserve raises rates while the ECB eases, the interest rate differential could sharply strengthen the dollar against the euro, as investors flock to higher-yielding US assets.

This divergence in monetary policy is often a significant driver of exchange rate fluctuations, and in this scenario, it could push the euro closer to parity with the dollar.

Beyond tariffs, a renewed Trump administration might pursue stricter immigration policies. Reduced immigration could limit the labor supply in the US, putting upward pressure on wages as firms compete for workers.

Higher wages would further contribute to inflation, reinforcing the need for tighter monetary policy from the Federal Reserve. This scenario would add another layer of support for the dollar, further disadvantaging the euro.

Analyst Forecasts for EUR/USD if Trump Wins

Luca Santos, a currency analyst at ACY Securities, noted: “A potential Trump victory could bring policy changes aimed at boosting US economic growth through domestic spending and a more protectionist trade stance. Such a scenario typically leads to further dollar strengthening as investors bet on a favorable economic climate for US assets.”

Georgette Boele, Senior FX and Precious Metals Strategist at ABN Amro, highlighted the impact of Trump’s trade policies on dollar performance, stating that “markets have priced in fewer rate cuts for the Fed and more for the ECB this year after strong US data.”

According to Boele, the ongoing shifts in pre-election polls have increased volatility in the dollar, with Trump’s increased probability of election impacting short-term market movements.

BBVA strategists Alejandro Cuadrado and Roberto Cobo anticipate that a Trump win could push the euro below $1.08, especially if the Republicans gain full control of Congress. Conversely, they predict a weaker dollar if Kamala Harris wins the election.

Goldman Sachs issued one of the most bearish forecasts for the euro. Analyst Michael Cahill suggests that “diverging monetary policy outcomes for the US and Europe could weaken the euro by around 3%.”

However, Cahill suggests that if Trump implements broad-based tariffs and domestic tax cuts, the euro could fall even further, potentially declining by 10% and pushing it to or below dollar parity.

Trump’s 2016-2020 Presidency and Euro Performance

Looking back, Trump’s victory in 2016 initially strengthened the dollar, causing the euro to fall from around $1.10 in October to $1.0340 in early 2017.

As Stefan Gerlach, Chief Economist at EFG Bank AG, recently wrote, the US elections led to a significant increase in US interest rates as markets anticipated Trump’s economic policies would boost growth and inflation.

As a result, the yield differential between US and German bonds widened, putting downward pressure on the euro in the months following Trump’s victory.

However, “from January to September 2017, the process went into reverse, with the interest rate differential in favor of the US narrowing to 1.85 percentage points and the dollar depreciating to $1.19 per euro.”

Two factors played a key role here: delays in Trump’s economic program and a turnaround in dollar gains as euro area growth improved. Political stability in Europe following pro-EU election victories in France and the Netherlands also provided significant support for the euro.

From February 2018 to March 2020, the euro declined from $1.25 to $1.06 as the Federal Reserve raised interest rates while Eurozone inflation persistently remained below the 2% target.

However, following the COVID-19 pandemic, the euro rebounded as the Fed adopted ultra-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 presidency – the euro strengthened against the dollar from 1.10 to 1.18.

What Could Happen This Time?

While a fall to euro-dollar parity is far from guaranteed, certain factors under a Trump administration could heighten the risk, particularly for investors closely monitoring the EUR/USD exchange rate.

A combination of renewed US protectionism, rising inflation, and diverging central bank policies could play significant roles.

Given that inflation is already a major concern in the US, additional pressures potentially stemming from tariffs or stricter immigration policies could trigger a swift response from the Federal Reserve in the form of tighter monetary policy.

However, Europe faces a different economic outlook, with its growth being more fragile to external shocks. If US tariffs disproportionately impact European exports, the ECB might respond with further easing, widening the interest rate differential and increasing downward pressure on the euro.