Uphill start to the year for the euro. The exchange rate with the dollar collapsed yesterday, reaching its lowest point in the last two years. It fell 0.4% to $1.0314. Today (at the time of writing) it is recovering slightly, but in 2024 it has lost 5.5%. Many analysts predict a drop below parity by 2025.
Yesterday the record, since the collapse of November 2022. But the weakness of the single currency has been going on for months. The year 2024 closed 8% lower from September, with a further 1% decline yesterday, before a slight rebound this morning to $1.0282. Similar situation for the pound, a sign that the weakness concerns the whole of Europe.
There are three main factors that impact and worry about 2025. First of all, the economic situation of the Old Continent, compared to that of the United States. While the American economy is dodging the feared recession, Europe is experiencing severe difficulties. Germany, which has always been the driving force behind the Union, is struggling with a GDP that has been contracting for two years and a minimal growth forecast, as well as a fragile political situation, with elections brought forward in February. Ditto for France, where political instability goes hand in hand with a running public deficit and a slowing economy.
Then there is the trade question, with concerns about possible duties on European goods once Donald Trump entered the White House. The United States is the main market for many European products and an increase in tariffs could significantly reduce the competitiveness of the bloc’s exports. The Eurozone’s trade surplus, which reached 140.8 billion euros with the United States in the first nine months of 2024, risks falling dramatically. This would have an immediate impact on European economic growth and demand for the euro on the currency market, further contributing to its weakening.
Added to this is the divergence between monetary policies. The ECB is ready to continue with the rate cut, while the Fed does not have the same margins for action, with an economy that continues to do well and inflation that remains high. A discrepancy between the two central banks means stress for the single currency.
Frankfurt seems to accept, in part, the weakness of the euro. A weak exchange rate can overheat inflation, but it also allows the impact of any tariffs on exports to the United States to be curbed. But in the long term, a weak euro is risky for economic stability and growth.
