Market News

By Harry Robertson

LONDON (Reuters) - Goldman Sachs said on Tuesday the euro could fall as much as 10% - implying a drop below $1 from current levels - in a scenario in which Donald Trump imposes widespread tariffs and cuts domestic taxes if he wins the Nov. 5 U.S. presidential election.

Republican former President Trump is currently neck and neck with Democratic Vice President Kamala Harris, but Trump's radical economic policies would likely have the bigger impact on Europe, a key trading partner of both the United States and China.

Goldman said a scenario in which Republicans win the presidency and Congress could lead to higher tariffs and domestic tax cuts that would act as stimulus for the economy.

A 10% U.S. tariff on all imports and a 20% levy on Chinese products, combined with tax cuts, could cause the dollar to rally sharply and the euro to drop 8% to 10%, Goldman Sachs analyst Michael Cahill said in a note on Tuesday. The euro last traded at $1.083. It last traded below parity in November 2022.

Both measures would likely push up inflation, implying significantly higher interest rates in the U.S. than Europe that would boost the dollar's appeal.

"We expect the strongest dollar response to come from a Republican sweep, which would open the door to larger tariff increases in combination with domestic tax cuts," Cahill wrote

A narrower trade war, in which Trump only imposes further tariffs on China, could see the euro fall by around 3%, Cahill said.

"A Democratic sweep or divided Democratic government would likely result in some initial dollar downside, as markets reprice the prospect of more dramatic changes in tariffs."

The euro has dropped 2.7% so far in October, as the U.S. economy has pulled away from Europe, and as some investors have positioned for higher tariffs after a potential Trump victory.

(Reporting by Harry Robertson; editing by Dhara Ranasinghe and Amanda Cooper)