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The dollar’s recent strengthening could both benefit and hurt Europe, analysts say, with market watchers predicting further weakening of the bloc’s major currencies in 2025 when President-elect Donald Trump takes office in the US and economic uncertainty persists.
The US dollar index — which measures the dollar against a basket of rivals — hit its highest level in more than two years on Monday, after hotter than expected business report from the United States last week.
By 6:29 a.m. London time on Tuesday, the dollar index was down 0.3% at 109.59. A day earlier, it rose to 110, the highest price since November 2022.
As the dollar rallied, European currencies hit multi-year lows. The euro it fell 0.4% to $1.0199 by 12:50 a.m. London time on Monday, its lowest against the dollar since August 2022. It was little changed on Tuesday morning.
Meanwhile, British pound — which has already been under pressure in recent weeks thanks to increasing costs of government borrowing and concerns about the U.K. economy — was down 0.8% to trade at $1.2125 on Monday, its lowest since early 2023. Sterling was little changed at 7:00 a.m. London time on Tuesday.
The US dollar is likely to remain elevated as President-elect Donald Trump takes office again, while European currencies struggle to gain momentum, according to Bartosz Sawicka, market analyst at Conotoxia.
“I see a high probability that the markets will behave in a similar way to what we saw during Donald Trump’s first term as president – sharp, volatile moves, but no really strong trends, so the US dollar is likely to remain strong in the short term,” he said. he said.
In the long term, Sawicki predicts that the dollar could fall, especially with expectations of major rate cuts by the Federal Reserve have waned. He noted, however, that this does not guarantee good news for European currencies.
“The next few quarters will be tough for both the euro and the pound, which may fail to attract investors and attract capital inflows due to the fact that they are heavily influenced by the possibility of trade wars and uncertainty,” he told CNBC.
“We see that the euro will trade at $1.05 at the end of the year, and [British pound] to $1.25 at the end of the year. So 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 bullish on both the euro and the pound.
His team at Deutsche Bank predicts a range of $0.95 to $1.05 for the euro this year, with possible new tariffs from Trump as one of the risk factors.
“BoE rates are at the peak of indecision with risks pointing to further cuts given weakening data flows,” Saravelos said of the British pound on Monday. “The outflow picture is weak with rising energy prices and persistently weak portfolio flows [foreign direct investment] picture … Hot foreign exchange inflows fueled by the transfer of money they supported [sterling] last year they are in danger of turning.”
However, for one European currency Saravelos had a positive perspective.
“We are bullish on the franc in Switzerland,” he said in a note on Monday. “We see continued easing by the Swiss National Bank (SNB), but with the zero floor soon to be reached, the pace of easing relative to the rest of the world will have to slow.”
He added that it is swiss franc was trading in the middle of its five-year range and that the new US administration was “probably less receptive to foreign exchange intervention”. In 2020, under then-President Trump, the US accused Switzerland of deliberately devaluing its currency against the dollar — an accusation the country’s officials refused.
“It is unlikely that the SNB will aggressively counter the strengthening of the franc, allowing it to outperform,” Saravelos said on Monday.
Alex King, former FX trader and founder of a personal finance platform The money of a generationtold CNBC that the rising value of the dollar has implications for several European economies.
The United Kingdom, for example, could come to grips with another rise in 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 boost inflation in the coming months, adding to existing inflation concerns due to potential 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”. increasing costs of government borrowing, sticky inflation and increase in wage costs.
“On the other hand, the UK has a trade surplus with the US, so this is potentially good news for UK exporters whose products become relatively cheaper for US importers,” he added.
Likewise, Germany huhwith has become a significant importer of US 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 the hardest.
“Many German manufacturers have been struggling with higher energy costs for some time, so any further increase could potentially wreak havoc,” he said.
When it comes to a potential winner in Europe, King said Norway could take some prize money from the strong dollar.
At 7:20 a.m. London time on Tuesday, the Norwegian krone was up about 0.2%.
“A small European player in terms of size, Norway will benefit from the strengthening of the US dollar as it is a major oil exporter,” King noted. “With its main export priced in dollars, Norway’s income will rise. At the same time, Norway’s huge sovereign wealth fund has significant exposure to dollar-denominated assets, so this should also see an increase in value.”
