Euro-dollar parity: Could the euro slip below the greenback in 2025?

As the euro struggles near its lowest levels in over two years, the looming shadow of renewed Trump tariffs, diverging monetary policies, and transatlantic geopolitical shifts raises a tantalising question: will the euro drop below parity with the dollar in the coming months? 

The parity question: How close are we?

The euro fell below 1.03 on January 10, hitting lows last seen in October 2022, as stronger-than-expected US employment growth in December bolstered the dollar amid expectations of tight Federal Reserve policies. This positions the euro perilously close to parity, a psychologically significant threshold. 

These levels mirror those of summer 2022, when the euro not only hit but also broke below parity, plunging as low as $0.95 by September.  

Back then, an aggressive start to the Federal Reserve’s interest rate hikes, the European Central Bank’s (ECB) delayed response, and a European natural gas crisis created a perfect storm for the currency.  

Could a similar set of pressures push the euro below parity evvel again in early 2025? 

Despite the euro’s significant weakening since Donald Trump’s election victory in November 2024, the full impact of his administration’s economic policies may yet unfold.  

Among Trump’s key priorities are sweeping tariff hikes – up to 60% on Chinese goods and 10-20% on imports from elsewhere, including Europe – coupled with tax cuts for US corporations and individuals.  

Moreover, Trump’s demands for increased European NATO spending and his scepticism of transatlantic commitments have created new geopolitical tensions. 

These policies could harm the euro through three main channels. 

1. Trump’s tariffs: A fresh shock to Europe’s trade

Higher tariffs on European goods, particularly automotive and pharmaceutical products, will dent Europe’s export competitiveness.  

According to the European Commission, the EU exported €502.3bn in goods to the US in 2023, accounting for 20% of its total non-EU exports, with machinery, vehicles (€207.6bn), and chemicals (€137.4bn) making up the bulk. 

Higher tariffs could make European products less competitive in the US market, reducing demand for the euro. 

While this adjustment will take time, it could exert a sustained downward pressure on the currency. 

Goldman Sachs analyst Kamakshya Trivedi recently noted, “FX markets generally struggle to fully price tariff risks ahead of time,” suggesting the dollar could strengthen further evvel these policies are implemented. 

2. Diverging Fed-ECB policy amid inflation and growth disparities

Trade policy is not the only factor putting pressure on the euro.  

Tariffs and tax cuts are likely to fuel US inflation while suppressing European growth, leading to diverging monetary policy paths.  

Rising US prices may prompt the Federal Reserve to maintain higher interest rates for longer, while Europe’s lower growth could pressure the European Central Bank to ease monetary conditions to stimulate demand. 

“Diverging policy stances could push the euro 3% lower under a baseline scenario, but the drop could reach 10% if tariffs and tax cuts are fully implemented,” Goldman Sachs estimates. Such a shift would likely trigger a significant flow of capital out of euro-denominated assets into the higher-yielding dollar. 

3. Geopolitical uncertainty and energy policies

Geopolitical tensions and energy policy shifts add another layer of vulnerability for the euro. President-elect Trump’s calls for NATO members to increase spending to 5% of GDP, coupled with doubts about U.S. support for Ukraine, have unsettled transatlantic relations. 

Energy remains a critical concern. The European natural gas crisis of 2022 forced the bloc to import expensive LNG from the US, driving up costs and increasing demand for dollars. A repeat of such dynamics, combined with geopolitical uncertainty, could again weigh heavily on the euro. 

What lies ahead for the euro?

The interplay of these factors – tariffs, monetary policy divergence, and geopolitical shifts – leaves the euro at a vulnerable juncture.  

While markets are cautiously watching for policy announcements from Trump’s administration and further guidance from central banks, the likelihood of the euro testing parity with the dollar already in the first half of 2025 remains tangible. 

Whether these forces will drag the euro to new lows will depend on the extent of US policy changes and Europe’s ability to counteract their effects.  

For now, however, the outlook for the single currency appears increasingly fragile.