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Analysts say the dollar’s recent strength could both benefit and hurt Europe as market watchers expect the bloc’s major currencies to weaken further in 2025 when President-elect Donald Trump takes office in the US and economic uncertainty persists.
The US dollar index — which measures the dollar against a basket of rivals — hit its highest level in more than two years on Monday, after the jobs report is hotter than expected from the United States last week.
The dollar index was down 0.3% at 109.59 by 6:29 a.m. London time on Tuesday. A day earlier, it rose to 110, the highest value since November 2022.
As the dollar moved higher, European currencies were at multi-year lows. The euro It fell 0.4% to $1.0199 by 12:50 a.m. London time on Monday, its lowest against the greenback since August 2022. It was practically unchanged on Tuesday morning.
Meanwhile, British pound — which has already come under pressure in recent weeks thanks to increase in the cost of government borrowing and concerns about the UK economy – fell 0.8% to $1.2125 on Monday, its lowest level since early 2023. The pound was little changed at 7:00 a.m. London time on Tuesday.
The US dollar is likely to remain high as President-elect Donald Trump re-enters office, while European currencies struggle to rally, according to Bartos Savicki, market analyst at Conotoxia.
“I see a high probability that the markets will behave in the same way that we saw during the first presidency of Donald Trump – sharp, volatile movements, but without any really strong trends, so the US dollar is likely to remain strong in the short term perspective,” he said. said.
In the long term, Savitsky predicts that the dollar may fall, especially with Expectations of the Federal Reserve for a big rate cut have not been met. However, he noted that this does not guarantee good news for European currencies.
“The next couple of quarters will be tough for both the euro and the pound, which may not attract investors and attract capital because they are heavily dependent on the prospect of trade wars and uncertainty,” he told CNBC.
“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. Therefore, there is no real respite for European currencies.”
Winners and losers
In a note to clients on Monday, George Saravelos, global head of currency research at Deutsche Bank, said he was bearish on both the euro and the pound.
His team at Deutsche Bank is forecasting a range of $0.95 to $1.05 per euro this year, with potential new tariffs from Trump one risk factor.
“The Bank of England’s pricing is at the peak of obnoxiousness with risks tipped for more contraction given the weakening data flow,” Saravelos said of the British pound on Monday. “The picture of external flows is weak in connection with the rise in energy prices and a consistently weak portfolio flow and picture (of foreign direct investment).
For one European currency, however, Saravelos had a positive outlook.
“In Switzerland, we are growing the franc,” he said in a note on Monday. “We see continued easing by the Swiss National Bank (SNB), but with the zero lower bound soon to be reached, the pace of easing relative to the rest of the world should slow.”
He added that Swiss franc traded in the middle of its five-year range, and that the new US administration is “likely to be less interventionist in the currency.” In 2020, under then-President Trump, the US accused Switzerland of deliberately devaluing its currency against the dollar – an allegation officials of the country rejected.
“It is unlikely that the SNB will aggressively counter the strengthening of the franc, allowing it to outperform,” Saravelos said on Monday.
Alex King, former currency trader and founder of a personal finance platform Generation of moneytold CNBC that the dollar’s rise had ramifications for several European economies.
Britain, for example, could face another price hike, he said.
“A stronger US dollar makes energy imports more expensive as the UK is a net energy importer – including imports of US LNG and oil,” he explained in emailed comments. “This could push up inflation in the coming months, adding to existing inflation concerns over potential US tariffs.”
King suggested this could put the UK economy in a precarious position as the Bank of England has “little room to maneuver to moderate rising inflation”. increase in the cost of government borrowing, sticky inflation and increasing wage costs.
“On the other hand, the UK has a trade surplus with the US, so this is potentially good news for UK exporters, whose products are becoming relatively cheaper for US importers,” he added.
Likewise, Germany has become a significant importer of U.S. LNG in recent years, King added, so a weaker euro could push up energy costs, with the country’s manufacturing sector the hardest hit.
“Many German manufacturers have been struggling with higher energy costs for some time, so any further increase could potentially cause chaos,” he said.
When it comes to Europe’s potential winner, King said Norway could reap some reward from a strong dollar.
The Norwegian krone was up about 0.2% at 7:20 a.m. London time on Tuesday.
“A small European player in terms of size, Norway will benefit from a stronger US dollar as it is a major oil exporter,” King noted. “Norway’s income will increase when the main exports are valued in dollars. At the same time, Norway’s huge sovereign wealth fund has a significant share of dollar-denominated assets, so the value of that should rise as well.”
