Trade war fears send euro to two-year low

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The euro fell to its lowest level in nearly two years against the dollar as the single currency suffers from the specter of US tariffs and a weakening economy.

The euro fell more than 1 percent to $1.033 on Friday on weaker-than-expected eurozone business activity data and hit its weakest level against the dollar since Europe’s energy crisis in late 2022. The euro then recovered slightly to $1.041.

The currency has fallen sharply since the US election earlier this month as investors bet Donald Trump’s plans to expand global tariffs will hit EU economic growth and prompt the European Central Bank to cut interest rates more aggressively.

“Trump’s decisive election victory heightens expectations for a longer period of US exceptionalism,” encouraging an “even more overvalued” dollar, said Lee Hardman, senior currency analyst at MUFG.

“A trade war with the US is the last thing Europe needs right now, as economic growth is already weak,” he added.

A survey of euro zone purchasing managers on Friday showed business activity unexpectedly slowed this month. The index fell to 48.1, below the 50 level that separates expansion from contraction.

Investors reacted by pricing in a higher chance of a larger half-point cut at next month’s ECB meeting, putting the likelihood at 60 percent, up from around 30 percent before the PMI data, according to levels implied in swap markets.

The euro’s fall was also a reaction to the deteriorating geopolitical situation in Europe and its consequences for the eurozone economy amid Russia’s deepening war with Ukraine, analysts say.

Chris Turner, ING’s global head of markets, said rising natural gas prices had raised concerns about the potential impact on the eurozone’s trade balance and a hit to the currency.

“Traders are looking back at the 2022 natural gas price surge and what it did to European currencies,” he added.

The euro has been falling since September, partly the victim of so-called Trump deals that intensified after the US presidential election.

Investors are betting that the president-elect’s promised combination of tax cuts and tariffs will put upward pressure on U.S. inflation and interest rates but will hold back economic growth in the EU.

The dollar, which took a hit from lower-than-expected unemployment figures on Thursday, has been in a stop-start rally in recent sessions as traders watch signals about Trump’s likely Treasury cabinet picks, wondering whether a specific the appointee can relax his tariff and other plans.

Investors are warning that the prospect of significant tariffs against the EU and its main trading partner China could push the euro towards parity with the dollar in the coming months.

This is partly due to changing interest rate expectations. Traders moved to cut the ECB’s benchmark lending rate more quickly due to the gloomier outlook for the bloc’s export-exposed economy.

Investors now generally expect a quarter-point rate cut at each of the next four ECB meetings, in line with levels implied in swap markets.