Stability of the Euro Despite Tariff News
The euro managed to hold its ground against the US dollar on Tuesday, despite facing renewed tariff threats from President-elect Donald Trump aimed at imports from Canada and Mexico. Trump announced on Truth Social that he plans to implement a 25% tariff on goods from these neighboring countries. In response, both the Canadian dollar and Mexican peso tumbled to multi-year lows against the dollar, highlighting the immediate impact of such statements on currency markets.
Potential Trade Negotiations on the Horizon
Analysts anticipate that Trump’s latest tariff proposals may prompt renewed trade negotiations between the United States and its partners. This development could lead to increased volatility in currency markets. Initially, the euro dipped in value before managing to recover some losses, ultimately ending the trading day unchanged. It stabilized at just below 1.05 against the dollar in the early Asian trading session on Wednesday.
Ongoing Pressure on the Euro
Despite the euro’s recent stabilization, it faces significant pressure, having recently plummeted to a two-year low of 1.0330 against the dollar. Since Trump’s election victory on November 5, the euro has decreased by 6 cents against the dollar and could see further depreciation due to current global economic circumstances. Analysts suggest that Trump’s tariff threats could drive trading partners to hedge their investments, thus increasing demand for the dollar and adding downward pressure on the euro.
Fundamental Weaknesses Impacting the Euro
Several underlying factors contribute to the euro’s vulnerability against the dollar. The recent release of Federal Reserve meeting minutes indicates a preference among officials for a cautious approach to interest rate cuts, which could further support the dollar. Additionally, Trump’s tariff announcements have negatively affected the European automotive sector, leading to a pessimistic sentiment across major European equity markets. Experts warn that should Trump proceed with proposed tariffs of 10% on imports from other countries and 60% on China, the euro may need to weaken further to maintain competitiveness for European exporters.
Glimmers of Hope in Market Data
In the near term, markets look forward to the eurozone’s flash Consumer Price Index (CPI) for November, set to be released on Thursday. An expected rise in inflation to 2.3% could induce a more hawkish stance from the European Central Bank (ECB), potentially providing some support for the euro. Additionally, a recent decline in US government bond yields, following Trump’s nomination of Scott Bessent as Treasury Secretary—a figure perceived as less aggressive on tariff policies—might alleviate some of the tensions in global trade. This counterbalance could offer a temporary respite for the euro amid ongoing currency fluctuations.
SOURCE: Ref Image from Barron
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