Market News

By Naomi Tajitsu and Anchalee Worrachate

(Bloomberg) -- Currency strategists are ripping up forecasts for the euro in the wake of the US election and coming up with a new call: a slide toward parity with the dollar.

At least 10 banks — including Barclays Plc, Deutsche Bank AG and Nomura International Plc — have slashed their calls in the past week, a turnaround from recent months when many were lifting the outlook for the common currency. Pictet Wealth Management is among those calling for a 6% drop to parity. And bets in the options market show traders wagering against the euro as a favorite way to play the outlook for Donald Trump’s presidency.

The changing landscape in the currency market follows anticipation that global trade restrictions could become a key pillar of Trump’s economic policy when he returns to the White House next year. That’s been prompting investors to dump the euro — it’s already down nearly 3% since his victory to near this year’s low — as tariffs would hurt Europe’s export industries at a time of political uncertainty in its major economies.

“This is the worst-case scenario you can think of for the euro,” said Mark McCormick, the global head of FX and EM strategy at TD Securities, who expects the euro to fall to $1.03 by the time Trump takes office in January. Parity “is absolutely in play” after that, he said.

While market sentiment already turned against the euro last month as betting markets favored a Trump win, the scale of his victory — putting Republicans on the brink of full control in Washington — means there’s more chance of his tariff policy plans being implemented. This “Red Wave scenario” increases the risks of getting to euro parity, McCormick said.

Others now see a heavy hit for the common currency. Mizuho International Plc expects $1.01 by March, while ING Groep NV forecasts it will reach that level by early 2026. The Dutch bank was among those issuing the biggest downgrade — it previously saw $1.10.

Overall, analysts tracked by Bloomberg forecast $1.09 for next year, sharply down from $1.13 before the election.

The options market is also signaling more weakness for the euro. Data from the Depository Trust & Clearing Corporation show that around €2 billion was wagered last month on vanilla options for the euro falling to $1 next year.

Bets for a weaker euro by hedge funds and other leveraged investors were already hovering around their biggest in around three years in the run-up to last week’s vote, according to the latest Commodity Futures Trading Commission data, and positions are likely to have ballooned since then.

Even for Wall Street banks that haven’t revised their forecasts, parity is a possibility and several have recommended selling the euro. Goldman Sachs Group Inc. sees the risk of the common currency trading below the dollar in the case of Trump imposing global tariffs as well as US tax cuts. Ahead of the vote, Trump pledged to slap 60% tariffs on all goods coming in from China and 10% to 20% tariffs on imports from other countries.

The economic hit from tariffs to Europe would also mean the European Central Bank is likely to cut interest rates faster than the Federal Reserve in the US, where pro-growth policies could boost inflation and slow easing.

“Euro-dollar could trade through $1.05 and head towards parity assuming the red sweep is confirmed,” JPMorgan Chase & Co. currency strategists led by Meera Chandan wrote. They see the currency facing a double whammy of pressure from tariffs and negative sentiment in Europe. Germany narrowly avoided a recession and its government just collapsed, while there’s still political risk in France after its snap election this year.

Some are not convinced that the euro will fall as far as parity. Amundi SA points out that the market is already heavily tilted in favor of a weaker euro.

“A strong dollar, yes, but not that far,” said Andreas Koenig, head of global currency management at the asset management company. “Too many already have the position and therefore it’s not going that fast.”

Others are watching to see if the currency can break through support levels, with this year’s low around $1.06 and then $1.05 the next lines in the sand. A break of the latter would lead RBC BlueBay Asset Management to look at adding to its position of selling the euro.

“The market wasn’t really pricing in a GOP sweep,” said portfolio manager Neil Mehta. “Parity is in play if Trump is very hawkish. And there’s a lot of uncertainty about Europe’s economic outlook.”

--With assistance from Vassilis Karamanis.