One US dollar has only been worth more than €1 a handful of times in the history of the single European currency – on a few occasions between 2000 and 2002 and then in mid 2022. Now forecasters believe it may be about to happen again.
A big surge in the dollar in the last quarter of 2024 has left the euro trading at about $1.03, and the stronger outlook for economic growth in the US this year means most big investment banks expect parity to be broken in the first part of this year, even if there are doubts about the impact beyond that of the policies of Donald Trump.
This trend has significant implications for the euro zone and for Ireland, with the US being one of this country’s key markets for exports and investment. Many key imports, notably in energy, are priced in dollars. A weaker euro helps exporters to the US, but it makes imports more expensive. It also makes it more expensive to visit the US on holidays, though helps Americans visiting here.
So far, investors have bet that Trump will be good for US markets, with equities rising since his re-election and helping to pull funds into the dollar, which has gained ground against pretty much all other major currencies, rising about 8 per cent on average in the final quarter of last year.
Relatively strong growth prospects in the US contrast with a weakening outlook in the euro zone. The appetite of investors for the dollar has been boosted by speculation that further US interest cuts will be slow to emerge, while in Europe the European Central Bank (ECB) is expected to cut more aggressively, notwithstanding recent figures that show inflation remaining stubbornly above the 2 per cent target level.
This relative optimism has benefited the dollar. The decline since September in the euro has been notable, according to economist Simon Barry, from around $1.15 in late September to $1.03 now, about its lowest level for two years. “This depreciation reflects a confluence of factors, including relative economic performance, monetary policy expectations and heightened geopolitical and domestic political uncertainties within the euro zone, particularly in Germany and France,” he said.
The euro zone’s overall performance remains poor, with growth of 0.9 per cent year-on-year in quarter three of last year, contrasting with US growth of 2.7 per cent over the same period. Figures for the US services sector this week were strong, as were job vacancy data. Investors are now betting on just one further quarter-point interest rate cut from the Federal Reserve Board, the US central bank, this week. The next key US indicator will be payroll figures on Friday.
In Europe, while recent inflation figures have been a bit higher than forecast – at 2.4 per cent in December compared to 2.2 per cent in November – on balance analysts expect ECB interest rate cuts to continue, spurred by poor growth outlook in the main euro-zone countries. German industrial data this week was again poor. Another three or four interest-rate cuts could be in prospect in the euro zone this year, meaning investors get a lower return for holding the single European currency.
Recent political developments in Germany and France have increased uncertainty. “This type of self-inflicted downside is especially unwelcome at a time when economic momentum is already weakening and when external risks are also intensifying,” Barry said.
For now, analysts believe the dollar will remain on the up. “Large tax cuts and tariffs are likely to result in a continued appreciation for the dollar – in part because of the upward pressure they may place on US interest rates and demand for dollars,” according to Gerard Brady, chief economist at Ibec, the employers’ lobby group. This outlook for dollar strength “will have a significant impact on Ireland and the euro zone”, he said.
“On one side this dollar appreciation relative to the euro may make euro-zone exports to the US more competitive. This could partly offset the impact of any potential tariffs on countries with large exports to the US,” according to Brady. ”For countries, like Ireland, where much of our US exports are invoiced in dollars, a dollar appreciation would widen margins and might make investments from the US into Ireland more attractive. However, it would also result in higher import prices.”
Many commodities are priced in dollars and this means just over half of all EU imports are invoiced in the US currency, notably oil and liquefied natural gas. “This could put upward pressure on inflation and euro-zone interest rates at exactly the point the ECB needs to cut rates and support demand,” Brady said.
A poll published by Reuters this week of market expectations showed that 24 of 38 analysts surveyed expected the euro to fall to parity against the dollar in the coming months. This is a strong majority – almost two-thirds – though not a landslide. Currency forecasting is a notoriously difficult business and the policy uncertainties of the incoming Trump administration are an extra factor in the mix.
On average, analysts expect the US currency to remain strong and break through parity with the euro, but they do not expect it to end the year a whole lot higher than it is at the moment. In other words, the dollar may have a bit more to go in the short term, but after that – as with US equities – there are questions about whether it can make much further ground.
A lot will depend on what Trump actually does and the impact on the wider US economy and stock market. The S&P 500 index of US shares rose 23 per cent last year, driven by a few big tech stocks and the hopes of major profits from the AI sector. The betting so far has been that Trump’s pro-business agenda and cutting regulation and taxes will keep US shares on the up and will lead to some more upside for the dollar.
But there is a lot of uncertainty too and a contrast in market performance, with many economists saying that if Trump actually implements the policies he is threatening to in areas such as tariffs and immigration then this will hit growth.
This could mean trouble for equity markets, which are already trading on high evaluations compared to profit levels. In turn, by cutting demand from investors for US dollars this could lead the value of the dollar to fall back. And remember that Trump himself wants to see a weaker dollar to help US exporters even if it is unclear how he might achieve that goal.
These uncertainties mean that for the dollar – and US and world markets generally – a volatile year could be in prospect. Much of what Trump says he plans, for example replacing part of the US income tax base with revenues raised from tariffs, is unprecedented. A wider trade war is quite possible while tensions with China will continue to simmer.
For Irish businesses relying on the value of the dollar, and for consumers looking to the future of energy costs, it is important to realise that a new volatility has entered the equation. In the short term, the US currency may well breach the parity barrier. And the relatively strong US growth performance means this could continue, particularly if Trump prioritises the markets and business and he steps back from some of his more potentially damaging policies.
So far, however, the messages from Trump and his associates are decidedly mixed, often contradictory, and the US president-elect looks determined to make a quick start in office. This means significant volatility most likely lies ahead.
