Market News

By Vassilis Karamanis

(Bloomberg) -- The euro gained on Tuesday after Europe escaped the latest round of Donald Trump’s trade tariff threats and as investors positioned for what historically has been the strongest month for the currency.

The common currency was up 0.2% to $1.0512, outperforming most of its Group-of-10 peers, after Trump vowed additional tariffs on the US’s main trading partners without mentioning the euro area. His comments boosted the dollar across the board. 

The euro’s rebound from a two-year low reached last week was compounded by month-end flows and anticipation that the currency will follow a historical pattern and strengthen going into the end of the year. December has been the best month for the euro since its introduction, providing an average gain of 1.5%. 

“A lot of negatives are already in the price and the euro is looking excessively oversold, while more favorable month-end rebalancing flows could further help stabilize the outlook,” according to Valentin Marinov, head of G-10 FX research at Credit Agricole CIB in London.

The euro slumped more than 6% since late September on bets that Trump’s potential trade tariffs would hit Europe’s exports and economic growth, forcing euro-area policymakers to cut interest rates more aggressively. That view fueled calls for the currency to reach parity with the dollar next year. 

While it’s too soon to say the region is out of the woods when it comes to US-imposed trade restrictions, Trump focused on China, Canada and Mexico in his first specific tariff alert since his election win. He said he would impose additional 10% tariffs on goods from the Asian nation and 25% tariffs on all products from its two neighbors. 

Jordan Rochester, head of macro strategy at Mizuho International, said the question on whether Trump forgot Europe in his comments or omitted it on purpose offers support for the euro in the short term. He also mentioned month-end rebalancing involving dollar selling as another factor helping the common currency. 

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Still, any euro gains into year-end may be temporary as the macro backdrop remains in favor of the dollar. Money markets currently price 150 basis points of easing by the European Central Bank by the end of 2025, double than the policy easing projected from the Federal Reserve.

Also the possibility of global trade restrictions under a Trump presidency remains a major headwind and Bloomberg’s FX forecasting model assigns a 20% chance that the euro will hit parity in the next three months.

“How much the euro weakens will largely depend on the policy mix that is delivered by the Trump administration, the speed of implementation as well as the policy response from other countries,” according to Deutsche Bank AG strategists who forecast the euro will fall to parity in the second quarter of 2025.

• NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice