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The recent strengthening of the greenback could both benefit and hurt Europe, analysts say, with market watchers anticipating further weakening of the bloc’s major currencies in 2025 as President-elect Donald Trump assumes the office in the United States and economic uncertainty persists.
U US dollar index – which measures the greenback against a basket of rivals – hit its highest level in more than two years on Monday, after a hotter than expected labor report out of the US last week.
At 6:29 London time on Tuesday, the dollar index was down 0.3% to trade at 109.59. A day earlier, it rose to 110, its highest price since November 2022.
As the greenback moved higher, European currencies were at multi-year lows. U euros fell 0.4% to $1.0199 by 12:50 pm London time on Monday, its lowest value against the dollar since August 2022. It was little changed on Tuesday morning.
Meanwhile, the British pound – which had already been under pressure in recent weeks thanks to the increase in government borrowing costs and concerns about the UK economy – fell 0.8% to trade at $1.2125 on Monday, its lowest since early 2023. At 7:00am London time on Tuesday, the pound was little changed.
The US dollar is likely to remain elevated as President-elect Donald Trump takes office again, with European currencies struggling to gain momentum, according to Bartosz Sawicki, market analyst at Conotoxia.
“I see a high probability that the markets will behave in a similar way to what we observed during the first presidency of Donald Trump – sudden and volatile movements, but without really strong trends, so the US dollar will probably remain strong in the short term,” he . he said.
In the longer term, Sawicki predicts that the dollar could trend lower, particularly with expectations of big rate cuts from the Federal Reserve are dashing. He noted, however, that this did not guarantee good news for the currencies of Europe.
“The next two quarters will be tough for both the euro and the pound, which may fail to attract investors and attract capital flows due to the fact that they are heavily influenced by 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] to $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 FX research at Deutsche Bank, said he was bearish on both the euro and sterling.
His team at Deutsche Bank projects a range of $0.95 to $1.05 for the euro this year, with potential new tariffs from Trump one of the risk factors at play.
“Bank of England rates are at peak hawkish with risks tilted towards more cuts given the weakening data flow,” Saravelos said of the British pound on Monday. “The external flow picture is weak with rising energy prices and a persistently weak portfolio flow and [foreign direct investment] print … FX flows driven by the hot money they support [sterling] last year they are at risk of returning.”
For a European currency, however, Saravelos had a positive outlook.
“In Switzerland we are bullish on the franc,” he said in Monday’s note. “We have seen continued easing by the Swiss National Bank (SNB), but with the zero lower bound coming soon, the pace of easing versus the rest of the world will have to slow down.”
He added that the swiss franc was trading in the middle of its five-year range, and that the incoming US administration was “probably less likely to accept FX intervention”. In 2020, under President Trump, the United States accused Switzerland of deliberately devaluing its currency against the dollar – an allegation. country officials refused.
“It is unlikely that the SNB will aggressively cool down the strength of the franc, allowing it to overcome,” Saravelos said on Monday.
Alex King, a former FX trader and founder of the personal finance platform Money generationtold CNBC that the rising value of the dollar had implications for many European economies.
The United Kingdom, for example, could find itself grappling with rising fresh produce prices, he said.
“The strength of the US dollar makes energy imports more expensive as the UK is a net importer of energy – including imports of US LNG and oil,” he explained in emailed comments . “This could push up inflation in the coming months, which would add to existing inflationary concerns about potential upcoming US tariffs.”
This could put the UK economy in a precarious position, King suggested, as the Bank of England has “little room to maneuver to mitigate increased inflation” in the meantime. the increase in government borrowing costs, sticky inflation and increase wage costs.
“On the other hand, the UK runs a trade surplus with the US, so it is potentially good news for UK exporters that their products become relatively cheaper for US importers,” he added.
As, Germany hass The United States has become a significant importer of LNG in recent years, King added, so a weaker euro could push up energy costs, with the country’s manufacturing sector likely to be hit hardest.
“Many German manufacturers have been struggling with higher energy costs for some time, so any further increases could potentially wreak havoc,” he said.
When it comes to a potential winner in Europe, King said Norway could earn a reward from a strong dollar.
At 7:20 am London time on Tuesday, the Norwegian krone was up 0.2%.
“A small European player by size, Norway stands to benefit from a strengthening US dollar as it is a major oil exporter,” King said. “With its main exports priced in dollars, Norway’s income rose. At the same time, Norway’s large sovereign wealth fund has significant exposure to dollar-denominated assets, so this should also see an increase in value.”
