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The recent strengthening of the greenback could both benefit and hurt Europe, analysts say, with market watchers anticipating further weakening of the bloc’s major currencies in 2025 as President-elect Donald Trump takes office in the U.S. and economic uncertainty persists.
The U.S. dollar index — which measures the greenback against a basket of rivals — hit its highest level in more than two years on Monday, following a hotter-than-expected jobs report out of the United States last week.
By 6:29 a.m. London time on Tuesday, the dollar index was down 0.3% to trade at 109.59. A day earlier, it climbed to 110, its highest price since Nov. 2022.
As the greenback moved upward, European currencies found themselves at multi-year lows. The euro fell 0.4% to $1.0199 by 12:50 p.m. London time on Monday, its lowest value against the dollar since Aug. 2022. It was little changed on Tuesday morning.
Meanwhile, the British pound — which had already come under pressure in recent weeks thanks to rising government borrowing costs and concerns about the U.K. economy — shed 0.8% to trade at $1.2125 on Monday, its lowest since early 2023. At 7:00 a.m. London time on Tuesday, sterling was little changed.
The U.S. dollar is likely to remain elevated as President-elect Donald Trump takes office once again, with European currencies struggling to gain momentum, according to Bartosz Sawicki, market analyst at Conotoxia.
“I see a high probability of markets behaving in a similar way to what we observed during Donald Trump’s first presidency — sharp, volatile moves, but without any really strong trends, so the U.S. dollar will likely stay strong in the short term,” he said.
In the longer term, Sawicki predicts that the dollar might trend lower, particularly with expectations of big rate cuts from the Federal Reserve faltering. He noted, however, that this didn’t guarantee good news for Europe’s currencies.
“The next couple of quarters will be tough for both the euro and sterling, which might fail to lure investors and attract capital inflows due to the fact that they are highly influenced by the prospect of trade wars and uncertainty,” he told CNBC.
“We see the euro trading at $1.05 at the end of the year, and the [British pound] at $1.25 at the end of the year. So, no real respite for the European currencies.”
Winners and losers
In a note to clients on Monday, George Saravelos, global head of FX research at Deutsche Bank, said he was bearish on both the euro and sterling.
His team at Deutsche Bank projects a range of $0.95 to $1.05 for the euro this year, with potential new tariffs from Trump one of the risk factors at play.
“Bank of England pricing is at peak hawkishness with risks skewed towards more cuts given the weakening in the data flow,” Saravelos said of the British pound on Monday. “The external flow picture is weak with rising energy prices and a persistently weak portfolio flow and [foreign direct investment] picture … The hot money carry-driven FX inflows that supported [sterling] last year are at risk of turning.”
For one European currency, however, Saravelos had a positive outlook.
“Over in Switzerland we are bullish the franc,” he said in Monday’s note. “We see continued easing from the Swiss National Bank (SNB), but with the zero lower bound soon to be hit, the pace of easing versus the rest of the world will have to slow.”
He added that the Swiss franc was trading in the middle of its five-year range, and that the incoming U.S. administration was “likely less accepting of FX intervention.” In 2020, under then-president Trump, the U.S. accused Switzerland of deliberately devaluing its currency against the dollar — an allegation the country’s officials rejected.
“It is unlikely the SNB aggressively pushes back on franc strength, allowing it to outperform,” Saravelos said on Monday.
Alex King, a former FX trader and founder of personal finance platform Generation Money, told CNBC that the rising value of the dollar had implications for several European economies.
The U.K., for example, could find itself grappling with fresh price rises, he said.
“The U.S. dollar strength makes energy imports more expensive as the U.K. is a net energy importer — including imports of U.S. LNG and oil,” he explained in emailed comments. “This could push up inflation over the coming months, which would add to existing inflation concerns over potential U.S. tariffs to come.”
This could put the U.K. economy in a precarious position, King suggested, as the Bank of England has “little room for maneuver to mitigate increased inflation” amid rising government borrowing costs, sticky inflation and increasing wage costs.
“On the other hand, the U.K. runs a trade surplus with the U.S., so it’s potentially good news for U.K. exporters whose products become relatively cheaper for U.S. 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 hit hardest.
“Many German manufacturers have struggled with higher energy costs for some time, so any further increase could potentially wreak havoc,” he said.
When it comes to a potential winner in Europe, King said Norway could reap some reward from a strong dollar.
At 7:20 a.m. London time on Tuesday, the Norwegian krone was up around 0.2%.
“A small European player by size, Norway is set to benefit from a strengthening U.S. dollar as it is a major oil exporter,” King noted. “With its main exports priced in dollars, Norway’s income will rise. At the same time, Norway’s huge sovereign wealth fund has significant exposure to dollar-denominated assets, so this should also see a rise in value.”
