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Analysts say the dollar's recent strengthening could both benefit and harm Europe, with market watchers anticipating further weakness in the bloc's major currencies in 2025 as President-elect Donald Trump takes office in the United States and economic uncertainty persists.
the US dollar index – which measures the US currency against a basket of rival currencies – reached its highest level in more than two years on Monday, after… Jobs report hotter than expected From the United States last week.
By 6:29 a.m. London time on Tuesday, the dollar index was down 0.3% to trade at 109.59. The previous day, it rose to 110, its highest price since November 2022.
As the US currency moved higher, European currencies found themselves at their lowest levels in several years. the euro It fell 0.4% to $1.0199 by 12:50pm London time on Monday, its lowest value against the dollar since August 2022. It was little changed on Tuesday morning.
At the same time, British pound – which has already been under pressure in recent weeks thanks to High government borrowing costs and concerns about the UK economy – fell 0.8% to trade at $1.2125 on Monday, its lowest level since early 2023. At 7:00 a.m. London time on Tuesday, the British pound was little changed.
The US dollar is likely to remain higher as President-elect Donald Trump takes office again, as European currencies struggle to gain momentum, according to Bartosz Sawicki, market analyst at Konotexia.
“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 – sharp and volatile movements, but without any really strong trends, so the US dollar is likely to remain strong in the short term.” He said.
In the long term, Sawicki expects that the dollar may trend lower, especially with… Expectations of deep interest rate cuts by the Federal Reserve falter. But he pointed out that this does not guarantee good news for European currencies.
“The next two quarters will be difficult for both the euro and the pound, which may fail to attract investors and attract capital flows due to the fact that they are greatly affected by the possibility of trade wars and uncertainty,” he told CNBC.
“We see the euro trading at $1.05 at the end of the year, and (the pound) at $1.25 at the end of the year. So, there is no real relief 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 pessimistic on both the euro and the pound.
His team at Deutsche Bank expects a range of $0.95 to $1.05 for the euro this year, with the possibility of new tariffs from Trump being one of the risk factors at play.
“BoE rates are at peak hawkishness, with risks tilted towards further cuts due to weak data flows,” Saravelos said of the pound on Monday. “The external flow picture is weak with rising energy prices, portfolio flows remaining weak and the (foreign direct investment) picture…the hot money-driven foreign exchange inflows that supported (the pound) last year are at risk of shifting.”
But for a single European currency, Saravelos had a positive outlook.
“In Switzerland, we are bullish on the franc,” he said in a note on Monday. “We see continued easing from the Swiss National Bank, but with the zero lower bound soon, the pace of easing should slow versus the rest of the world.”
He added that Swiss franc It was trading in the middle of the five-year range, and the incoming US administration “was likely less receptive to intervention in the currency market.” In 2020, under then-President Trump, the United States accused Switzerland of deliberately devaluing its currency against the dollar – an allegation The country's officials refused.
“The SNB is unlikely to push back too strongly on the strength of the franc, allowing it to outperform,” Saravelos said on Monday.
Alex King, former forex trader and founder of the personal finance platform Generation moneyHe told CNBC that the rise in the value of the dollar had implications for many European economies.
The United Kingdom, for example, may find itself grappling with new price hikes, he said.
“A stronger US dollar makes energy imports more expensive because the UK is a net energy importer – including imports of US LNG and oil,” he explained in email comments. “This could lead to higher inflation over the coming months, which could add to existing inflation concerns about potential future US tariffs.”
King suggested this could put the UK economy in a precarious position, as the Bank of England does not have “much room to maneuver to mitigate rising inflation” amid… High government borrowing costs, Inflation is sticky and Increased wage costs.
“On the other hand, the UK has a trade surplus with the US, so this is likely good news for British exporters whose products have become relatively cheaper for US importers,” he added.
Likewise, Germany haQ King added that Turkey has become a large importer of US LNG in recent years, so a weak euro could lead to higher energy costs, with the country's manufacturing sector likely to be hit hardest.
“Many German manufacturers have been suffering from high energy costs for some time, so any further increase could create chaos,” he said.
When it comes to the potential winner in Europe, King said Norway could reap some rewards from a strong dollar.
At 7:20 a.m. London time on Tuesday, the Norwegian krone rose by about 0.2%.
King pointed out that “Norway, as a small European player in terms of size, is expected to benefit from the rise in the US dollar as a major oil exporter.” “With its main exports 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 a rise in value.”
