When was the euro parity against the dollar on the day Trump took office?

The Zhitong Finance App learned that as the US prepares for the return of the former president, the foreign exchange market is preparing for a rare event: the parity of the euro against the US dollar.

According to strategists at banks such as Bank of New York Mellon and Mizuho Bank, this could happen after Trump takes office later this month.

Since late September last year, the euro has fallen by more than 7% against the US dollar. Last week it hit 1.0226, the lowest level in more than two years. The options market suggests that the pair is about 40% likely to hit parity this quarter, while contract trading volume targeting this level surged last week.

The market is watching the consequences of Trump's swearing-in as president on January 20 to find potential catalysts. Bank of New York Mellon and Mizuho Bank expect that Europe will fall victim to a potential trade war, and that different growth expectations between Europe and the US may bring strength to the dollar, which has been rare in 20 years. Both major banks believe that the euro will reach parity against the US dollar as soon as this month.

Geoffrey Yu, senior strategist at Bank of New York Mellon said, “We are not far from this goal, so it may happen soon.” He anticipates that bearish sentiment on the euro will peak around the end of January when the Federal Reserve and ECB meet. “Affordability is inevitable.”

Since the birth of the euro in 1999, there have been only a few cases where the euro is parity with the dollar, and the emergence of this situation generally indicates that the euro's economic environment is relatively poor compared to the US. The last time this happened was in 2022. The outbreak of the Russian-Ukrainian conflict triggered an energy crisis and concerns about economic recession in Europe.

Currently, energy supply and security are still a concern. The interruption of Russian gas delivery via Ukraine to Europe last week was a reminder.

Europe's export-oriented economy is reflected in efforts to deal with the threat of US trade tariffs. This is reflected in people's expectations that the ECB will have to cut interest rates drastically. This is in stark contrast to the Federal Reserve's slow approach. Political instability in the Eurozone's largest economy has increased the pressure.

Antony Foster, head of G-10 foreign exchange spot trading at Nomura Securities, said: “Market sentiment couldn't be worse.” He believes that if Trump starts the tariff policy soon after taking the oath of office, January 20 will be a potential catalyst for the further weakening of the euro.

Although the euro rebounded this week when the US dollar weakened against other currencies across the board, and there are reports that options traders are abandoning parity bets, other major banks such as J.P. Morgan Chase said it is still possible to reach this level this quarter. Wells Fargo believes it is more likely to hit this threshold in the second quarter.

Jane Foley, head of foreign exchange strategy at Rabobank, said that this largely depends on whether the market further confirms a healthy inflation trend to support the ECB's more aggressive pace of interest rate cuts. According to the latest inflation data, the Eurozone's adjusted CPI annual rate in December was in line with expectations, rising to 2.4% from 2.2% in November, while the core harmonized CPI annual rate exceeded expectations, at 2.8%.

The market generally expects that the ECB will reduce deposit interest rates to 2.75% at the next meeting, while the Federal Reserve will keep interest rates within the 4.25% to 4.5% range, which highlights the widening differences in its monetary policy. Bank of New York Mellon's asset management of more than 50 trillion US dollars shows that investors' holdings of the euro have reached their lowest level in 20 years.

Nomura Securities' Foster asked, “How can anyone be optimistic about the euro?”