(Bloomberg) -- As America gets ready for the return to office of a prior president, the currency market is preparing for a rare event of its own: Parity between the dollar and the euro.
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That’s likely to follow Donald Trump’s inauguration later this month, according to strategists from banks including Bank of New York Mellon Corp. and Mizuho.
The common currency has tumbled over 7% against the greenback since late September and last week touched $1.0226, its lowest level in over two years. Options markets imply around a 40% chance the currency pair will hit parity this quarter and trading of contracts that target that level surged last week.
Markets are looking to the aftermath of Jan. 20, the day Trump is sworn in as president, for potential catalysts. BNY and Mizuho anticipate Europe will be a casualty of a potential trade war and that divergent growth expectations between the Europe and the US could usher in dollar strength rarely seen in two decades. Both see a move to parity as soon as this month.
“We’re not far off so it could happen very quickly,” said Geoffrey Yu, senior strategist at BNY, who sees euro bearishness peaking around the Federal Reserve and European Central Bank meetings at the end of January. “Parity is inevitable.”
Since the euro came into existence in 1999, it has traded at equal value to the dollar only a handful of times, with the threshold often indicative of relatively dire economic circumstances compared to the US. The last time was 2022, after Russia’s full-scale invasion of Ukraine sparked an energy crisis in Europe and fears of a recession.
Energy supply and security remain concerns, with the halt in flow of Russian gas to Europe via Ukraine last week serving as a reminder. But it’s unlikely an uptick in energy prices will concern European monetary policymakers with “growth in the doldrums,” said Jordan Rochester, head of macro strategy for EMEA at Mizuho.
Europe’s export-orientated economies are now grappling with the threat of US trade tariffs and expectations the European Central Bank will have to aggressively cut interest rates, in contrast to the go-slow approach at the Federal Reserve. Political instability in the bloc’s biggest economies adds to the pressure.
“Sentiment could not be worse,” said Antony Foster, head of G-10 FX spot trading at Nomura, who sees Jan. 20 providing a potential catalyst for further euro weakness, if Trump unleashes tariffs soon after he’s sworn in.