Global Currency Anxiety Eases, But Euro's Woes Persist?

 

This is seen by the market as a stability signal, and the US dollar index fell by 0.6% on the same day, marking the largest drop in two weeks, providing a rare breather for other major currencies, including the euro.

Jane Foley, head of foreign exchange strategy at Rabobank, told reporters: "The nomination of Besent has heated up market expectations that some tariffs or protectionist measures in the policy may be weakened." As an experienced Wall Street veteran, Besent advocates controlling the US budget deficit around 3% of gross domestic product (GDP), indicating a more cautious attitude towards further expanding the fiscal deficit.

However, weak economic growth intensified monetary policy divergence, and the superposition of external risks made it difficult for the euro to shake off downward pressure. The market is generally pessimistic about its ability to hold parity, believing that further weakening is just a matter of time.

"Safe Bet"

Against the backdrop of the government possibly reinstating "America First" policies, Besent's cautious and pragmatic attitude is interpreted by the market as a "safe bet." Especially on trade issues, he tends to adopt a gradual approach rather than the previous aggressive tariff measures, greatly alleviating market concerns about a return that could cause significant economic and foreign exchange fluctuations.

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The US dollar index recorded the largest drop in two weeks on the 25th, leading to a collective rebound in major currencies, including the euro. As of the New York close, the euro rose 0.72% against the US dollar,quote1.0493. The yield on the 10-year US Treasury note fell to 4.35%, hitting a near-week low, further weakening the upward momentum of the US dollar. Societe Generale strategist Stephen Spratt mentioned in a report that Besent is seen as a "market-friendly" Treasury Secretary, and his policy stance may provide a breather for emerging market currencies and other non-US currencies.

Some views believe that the US dollar's pullback may only be a temporary phenomenon. Schneider, head of foreign exchange at UBS Global Wealth Management, believes that the current weakness of the US dollar is more of a "market sentiment repair" and does not mean a fundamental shift in the long-term trend. If tariff policies dominate market discussions again, the US dollar may gain support once more.

Euro's Woes Persist?

Although the US dollar's pullback has provided some support for the euro, the internal problems and external pressures of the eurozone are always difficult to shake off. From the economic fundamentals to the policy outlook, the euro's disadvantages are continuously intensifying, and the market's expectations for it to fall to parity are heating up.

The weakness of the eurozone's economic growth has become the core factor dragging down the euro. Survey data released by S&P Global and Hamburg Bank on the 22nd showed that in November, the eurozone's services purchasing managers' index (PMI) preliminary value was 49.2, far below market expectations, reflecting the difficult economic recovery. The euro against the US dollar fell to a two-year low of 1.0336 US dollars.

Superimposed on the escalation of the Russia-Ukraine conflict, the uncertainty of energy supply has exacerbated the economic situation in the eurozone. Harry Woolman, an analyst at Validus Risk Management, believes that the eurozone is facing "multiple dilemmas," with the manufacturing industry deeply affected by high energy prices, and weak consumer demand causing economic growth to stagnate. Against this backdrop of structural weakness, the euro is likely to be hard-pressed to avoid the fate of further decline.

The divergence between the European Central Bank and the Federal Reserve on policy paths is also intensifying the euro's disadvantages. The market generally expects that by the end of 2025, the European Central Bank will have cumulatively cut interest rates by 150 basis points, while the Federal Reserve's rate cut is expected to be only 70 basis points. This widening interest rate differential further reduces the euro's appeal. At the same time, market expectations for future rate cuts by the European Central Bank are also heating up. Swap market data shows that the probability of a 50 basis point rate cut by the European Central Bank in December has risen to 62%. In comparison, Foley told reporters: "The Federal Reserve has been more restrained on the rate cut path, and the eurozone, suppressed by rate cut expectations, is likely to find it difficult to break out of a weak situation."

The euro against the US dollar has only broken parity twice in history, the most recent being in 2022, when the Russia-Ukraine conflict broke out, and the double whammy of an energy crisis and aggressive rate hikes by the Federal Reserve led to a significant devaluation of the euro. Currently, the eurozone's economic recovery is weak, and energy issues remain unresolved, with the risk of parity heating up again. Although some analysts believe that the risk has been partially factored in, the overall market sentiment remains pessimistic.

George Saravelos, head of foreign exchange research at Deutsche Bank, said that the stagnation of economic growth in the eurozone and policy uncertainty have further reduced market confidence in the euro. He warned that "once peripheral risks rise, the possibility of the euro breaking parity will increase rapidly."

Rabobank predicts that the euro against the US dollar may touch parity again by the middle of next year. Foley explained to reporters that this expectation is based on "the continued weakness of German and French economic data, increased political uncertainty, and the prospect of the European Central Bank's loose policy."