(Bloomberg) -- Currency traders are turning against the euro as Donald Trump’s victory in the US presidential race boosted the chance of aggressive European interest-rate cuts, driving the common currency toward parity with the dollar.
The euro tumbled 1.8% to $1.07 and headed for the worst one-day drop since March 2020 in the wake of the US election result. ABN Amro Bank NV, ING Groep NV and Manulife warn the rout will extend over the coming months to the level where one euro buys one dollar. Mizuho Financial Group Inc. and Deutsche Bank AG anticipate the currency will slide to $1.03 and $1.05, respectively, by year-end.
Differing trajectories on interest rates in Europe and the US are forcing strategists to reconsider their predictions. While Trump’s policies are seen as fueling inflation and curbing the Federal Reserve’s ability to cut rates, his promise of global trade tariffs could crank up the pain for Europe’s sputtering economy, requiring steeper easing by the European Central Bank.
“With the Fed raising rates or keeping rates high to fight inflation just as the ECB continues to lower rates likely at an accelerated pace, the widening interest rate differential is likely to weigh on the euro, possibly hitting parity,” said Georgette Boele, a strategist at ABN Amro, who correctly predicted the euro and dollar hitting that level in 2022.
The euro was among the worst performers in the Group of 10 on Wednesday while European bonds advanced on the prospect of deeper ECB cuts. Yields on benchmark two-year German bonds fell as much as 14 basis points to 2.16%.
“Trump is back and everybody has been fearing this moment,” said Michael Strobaek, global chief investment officer at Lombard Odier. “It’s very clear this outcome, in relative terms, is not great for European assets.”
Lombard Odier sees the ECB’s terminal rate at 1.5% or even below 1%, compared with 3.5% for the Fed’s key rate.
Money markets are betting on one percentage point of Fed cuts and around 1.30 percentage points of ECB reductions by September next year. That marks a widening since Tuesday when pricing pointed to 1.1 percentage points and 1.16 percentage points, respectively.
Going into the US vote, bets on euro-dollar parity were on the rise in options markets. Still, while the level of 1-for-1 now seems more likely, it’s not imminent, according to ING.
“Rate spreads are widening against the euro and a new risk premium will need to be added in for protectionism and potentially geopolitical risk too,” said Chris Turner, head of currency strategy at ING. “$1.05 looks the immediate target over the coming weeks, but a move to parity may need to wait until later in 2025 when the full force of the protectionist blast becomes clear.”
Other strategists are also waiting to see who wins the US House, given Democratic control would force Republicans to negotiate on policy measures. JPMorgan previously forecast the euro could slump as low as parity in the event of a Republican clean sweep. A Trump victory and a split congress, meanwhile, would push the euro dollar pair to 1.05 it said.
“There is a very plausible path to parity in the next six months,” said Nathan Thooft, a senior portfolio manager at Manulife Investment Management. “It is difficult to fight the sentiment, technicals, and current fundamentals in favor of the US dollar.”
--With assistance from Anya Andrianova.
(Updates market moves. An earlier version of this story corrected the title of Georgette Boele of ABN Amro.)
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