What a stronger dollar means for European currencies

Analysts say the recent strength in the dollar has been both good and bad for Europe, with market watchers expecting the euro zone's major currencies to weaken further in 2025 as President-elect Donald Trump takes office in the United States and economic uncertainty persists .

The U.S. dollar index, which measures the greenback against a basket of currencies, hit its highest level in more than two years on Monday after a better-than-expected U.S. jobs report last week.

The U.S. dollar index fell 0.3% to 109.59 as of 6:29 a.m. London time on Tuesday. A day earlier, the price climbed to 110, its highest price since November 2022.

European currencies find themselves at multi-year lows as the dollar rises. this EUR It was down 0.4% against the dollar at $1.0199 as of 12:50 pm London time on Monday, its lowest level since August 2022. Little changed Tuesday morning.

at the same time, GBP Sterling, which has come under pressure in recent weeks due to rising government borrowing costs and concerns about the UK economy, fell 0.8% to $1.2125 on Monday, its lowest level since early 2023. The pound was little changed at 7:00 a.m. London time on Tuesday.

Conotoxia market analyst Bartosz Sawicki said the dollar is likely to continue to move higher as President-elect Donald Trump takes office again, while European currencies struggle to gain momentum.

“I think the market is likely to behave similarly to what we observed during Donald Trump’s first term as president — wild, volatile, but not any real strong trends, so the dollar is likely to hold up in the short term,” he said. Strong.” said.

Savage predicts that the dollar is likely to weaken in the longer term, especially if expectations of a sharp rate cut by the Federal Reserve falter. However, he pointed out that this does not guarantee good news for European currencies.

“The next few quarters will be difficult for both the euro and the pound as they are severely affected by the trade war and uncertain outlook and may not be able to attract investors and attract capital inflows,” he told CNBC.

“We expect the euro to trade at $1.05 by the end of the year and sterling to trade at $1.25 by the end of the year. So there's no real breathing space for European currencies.”

George Saravelos, global head of foreign exchange research at Deutsche Bank, said in a note to clients on Monday that he was bearish on the euro and pound.

His team at Deutsche Bank expects the euro to trade between $0.95 and $1.05 against the dollar this year, with potential new tariffs from Trump among the risks.

“Given weak data flows and the Bank of England pricing in a hawkish peak, risks tilt towards further rate cuts,” Saravelos said of the pound on Monday. “With rising energy prices, portfolio flows and (foreign direct investment) Conditions continue to be weak, external flow conditions are weak… the hot money spread-driven FX inflows that supported (sterling) last year risk a shift.”

However, for a European currency, The outlook is positive for Saravelos.

“In Switzerland, we are bullish on the Swiss franc,” he said in a note on Monday. “We see the Swiss National Bank (SNB) continuing to implement policy easing, but with the zero lower bound about to be reached, the pace of easing will have to slow compared to the rest of the world.”

he added Swiss franc Trading in the middle of a five-year range, the incoming U.S. administration “may be less receptive to FX intervention.” In 2020, the United States, under then-President Trump, accused Switzerland of deliberately devaluing its currency against the dollar, a charge that Swiss officials denied.

“The SNB is unlikely to actively restrain the strength of the Swiss franc, allowing it to outperform,” Saravelos said on Monday.

Alex King, a former foreign exchange trader and founder of personal finance platform Generation Money, told CNBC that the appreciation of the U.S. dollar has had an impact on several European economies.

The UK, for example, may find itself grappling with new price increases, he said.

“A stronger dollar makes energy imports more expensive because the UK is a net importer of energy – including imports of US LNG and oil,” he explained in emailed comments. “This is likely to push up inflation in the coming months, exacerbating existing inflation concerns about possible future U.S. tariffs.”

King said this could leave the UK economy in a precarious position as the BoE would have “little room to maneuver to mitigate rising inflation” amid rising government borrowing costs, sticky inflation and rising wage costs.

“On the other hand, the UK has a trade surplus with the US, so this could be good news for UK exporters as their products are relatively cheaper for US importers,” he added.

Likewise, Germany has become a significant importer of U.S. LNG in recent years, King added, so a weaker euro could push up energy costs, with the country's manufacturing sector likely to be hardest hit.

“Many German manufacturers have been grappling with rising energy costs for some time, so any further increases could cause serious damage,” he said.

When it comes to potential winners in Europe, King said Norway could reap some rewards from a strong dollar.

The Norwegian krone was up about 0.2% as of 7:20 a.m. London time on Tuesday.

“Norway is a smaller country in Europe, but since it is a major oil exporter, it will benefit from a stronger U.S. dollar,” Kim noted. “Since its main exports are priced in U.S. dollars, Norway's revenue will rise. At the same time, Norway is huge “Sovereign wealth funds own a lot of dollar-denominated assets, so their value should also rise.”