Euro Weakness Amid Political Turmoil and U.S. Tariffs

By Sarupya Ganguly
BENGALURU (Reuters) – A retreating euro is expected to remain weak due to political issues in France and anticipated new U.S. tariffs, which are enhancing the dollar's appeal, a Reuters poll indicates.

While a rebound seems unlikely soon, most strategists believe the euro will not reach parity with the U.S. dollar in the next three months, largely because significant negative news is already accounted for in current valuations.

Political Instability in France

The euro has lost nearly 6% since late September, with expectations that France's government might collapse after far-right and left-wing parties have submitted no-confidence motions against Prime Minister Michel Barnier.

Concerns over euro zone growth, coupled with the likelihood of further European Central Bank (ECB) interest rate cuts, have driven the euro to a two-year low of $1.03 in late November.

Interest rate futures suggest over 1.5 percentage points of additional ECB rate cuts by the end of 2025, twice the amount projected for the U.S. Federal Reserve, where expectations have faded due to revived domestic inflation fears.

Forecasts on Euro's Future

According to a Reuters poll conducted on December 2-3, nearly 70 currency strategists predict the euro will trade around $1.05 in three months and decline further to about $1.04 in six months—significantly lower than previous estimates of $1.10 and $1.11.

Jane Foley, head of FX strategy at Rabobank, highlighted that the euro faces vulnerability linked to ongoing structural and political challenges in France and Germany. She emphasized concerns about potential contagion from France's issues.

Chances of Reaching Parity

While most strategists consider the chances of the euro dipping to parity with the U.S. dollar in the next six months to be low, a minority believe the likelihood is high.

Erik Nelson from Wells Fargo noted that current positioning in the market is already extreme regarding euro bearishness, which makes a quick drop to parity unlikely. Conversely, geopolitical factors could still influence the euro negatively next year.

In a related survey, approximately 90% of economists indicated that proposed tariffs from President-elect Donald Trump would significantly impact the euro zone's economy in the coming years.

If Trump implements higher tariffs or if the ECB accelerates rate cuts, it could push the euro-dollar exchange lower and potentially below parity, according to MUFG's Lee Hardman.

Conclusion

The market sentiment is that the U.S. dollar is likely to trade stronger than expected over the next few months, reinforcing the euro’s vulnerability amid looming economic pressures.