(Bloomberg) -- Euro parity with the dollar once seemed like an outside bet. Now it looks like an inevitability.
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Traders are rewriting their predictions for the common currency after US President Donald Trump said tariffs on the European Union will “definitely happen,” having made good on threats to impose levies on imports from Canada, Mexico and China. The warnings sent the euro down more than 2% to $1.0141, the lowest level since November 2022, and options show sentiment on the currency is the most bearish since July.
The euro is being punished by concern US restrictions on the region’s export-oriented economies could lead the European Central Bank to cut interest rates even more aggressively. That would further widen the gap to US borrowing costs and boost the appeal of the dollar as a currency to invest in.
“It’s hard to be optimistic on the euro,” said Jordan Rochester, head of FICC strategy at Mizuho Bank Ltd., who sees the currency sliding to parity versus the dollar in the first quarter. “Markets now need to price a much higher probability of blanket tariffs or specific EU tariffs coming ahead.”
Investors added to short-euro exposure at the second-fastest pace in six months on Monday. According to data from the Depository Trust & Clearing Corporation, a trader bet a notional amount of more than €300 million ($307 million) for the euro to hit parity by March 19, the day the US Federal Reserve announces its next policy decision.
Even without the burden of US tariffs, the outlook for the Eurozone economy is gloomy, and Governing Council member Gediminas Simkus said that the central bank is likely to lower borrowing costs beyond its next meeting. Still, data showed that euro-area inflation unexpectedly accelerated in January, supporting the ECB’s generally cautious approach to lowering interest rates.
What Bloomberg Strategists Say...
“Trump hasn’t outlined the level and scope of tariffs that he might announce against the EU. That means that traders have little choice but to price in the worst trade shock to the region in a long time. That suggests that any weakening of the euro against the dollar to parity will only be the beginning”
— Ven Ram, Cross-Assets Strategist, Dubai
Why the Euro Is Closing In on US Dollar Parity Again: QuickTake
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In terms of timing, markets are positioning for a strong chance of a move to parity and below by mid-year. Wagers also went through for the move to unfold as soon as this quarter. Some investors are betting on the euro weakening below $0.95.
“The growing prospect of a global trade war and tariffs heading towards the EU is a clean euro negative,” said Chris Turner, head of FX strategy at ING. Markets are likely to retain a “sell-rally mindset in euro-dollar.”
“A delayed European tariff implementation is the most dovish policy mix for the ECB,” wrote George Saravelos, head of FX research at Deutsche Bank in a note. He sees the euro-dollar pair slumping to $0.98-$0.99, as markets price in a higher tariff risk premium and an ECB terminal rate of 1.5%.
Saravelos sees tariffs on Beijing adding to disinflationary pressure in the euro-area as cheap Chinese goods are rerouted to the European market. That would keep euro-dollar parity on the cards even without specific tariff measures targeted at Europe, he said. Money-markets are currently pricing around 87 basis points of easing from the ECB by year-end.
(Updates with CPI data, comments.)
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