Экономист: к концу января евро может сравняться с долларом США

The year 2025 has already brought new trends to financial markets, one of which is the weakening of the euro in relationship to the USD. Why the euro rate is decreasing and what this will benefit the economy of Europe and, hence, the Baltic countries, explained

Alexandras Izgorodinas, an economist at Citadele bank Alexandras Izgorodinas. Economist of bank Citadele Alexandras Izgorodinas. Photo: Citadele Pank

The 2025 year has already introduced new trends to financial markets, one of which is the weakening of the euro in relationship to the USD. Why the euro exchange rate is weakening

and what this will benefit the economy of Europe and, by extension, the Baltic countries, explained Alexandras Izgorodinas, an economist at Citadele Bank Alexandras Izgorodinas.

From the beginning of 2025 year the euro has gained 0.4 percent against the dollar and the rate is almost equal. In today one euro is worth 1.03 dollars to the US, which is very close to parity, that is the equality of the euro and dollar exchange rates. The Euro has been weakening for some time in the relationship to the dollar, which has become especially noticeable after the Presidential election in the United States. From 5 November 2024 year the euro lost 2.6 percent to the dollar. So it is possible that the weakening of euro will continue, and by the end of January that is immediately after the inauguration of the new president of the US and dollar rates will equalize.

Weak economy, lowering base interest rates and Trump’s tariffs

The weakening of the euro to the USD is influenced by the weakness of the euro ratio to the US dollar.Several factors. The US economic cycle is strong, and for the first time indicators indicate that the US is at the peak of the inflationary wave. This is confirmed by and forecasts for base interest rates: Markets expect that the Federal Reserve System of the U.S. will reduce interest rates only one time in June 2025 year.

High base rate in the US and expected further reductions in interest rates in the eurozone will stimulate capital flows into the US, because higher base interest rates allow investors to earn more, which reduces the value of the euro relative to the dollar.

The European Central Bank (ECB) has reduced key interest rates since June 2024 already some few times, and forecasts point to further reductions. In the current time participants in the market assume that in the first half of 2025 we will see three to four reductions in rates. This forecast is influenced by the extremely weak economic cycle and slow inflation in the eurozone. The weak Eurozone economy already plays an important role in the ECB’s decisions as as inflation, which usually is the primary factor inducing the central bank to change interest rates.

Lately two additional factors have emerged that weaken the euro within the relationship to the dollar. Это план переизбранного президента США Дональда Трампа по введению импортных пошлин на товары из Европейского союза и желание правительства США использовать тарифы для оказания влияния на европейские компании с целью перенести деятельность в США и избежать импортных пошлин.

Trump’s inauguration will take place 20 January,After that the new President and his administration are expected to give more clear directions on tariff policy. Investors planned tariffs will provide additional motivation to leave Europe and direct capital to the US, that the transfer of production and tariffs could weaken the economy of the Eurozone. This, in turn, will likely push the ECB to further reduce interest rates or introduce other measures of economic stimulus.

The euro is likely to recover slowly

A number of signs indicate that, that the euro to dollar exchange rate will continue to decline until the end of

A more important question is whether after reaching parity we can expect the euro to strengthen to relate to the USD? I think that it is not. Probably, this time the euro will remain weak in the relationship to the dollar for a longer period of time particularly because of-for different prospects in the relationship of basic interest rates in Europe and the US, economic cycles and inflation, the threat of import duties and the plans of the American administration to transfer European companies to the US. For some time these factors are probably and will determine the weaker position of the euro on the relationship to the dollar.

The weak euro will compensate for tariffs, but they will be weaker for the dollar.increases inflationary risks

It is difficult to tell how a lower euro exchange rate will affect the European economy, because it will have both positive, and negative consequences for the Eurozone. Low exchange rate euro benefits exporters from the Eurozone, especially those who source products to the US, as the weaker euro compensates for part of the negative impact of tariffs.

The eurozone economy is much dependent on exports, so a low euro exchange rate is important. Low euro exchange rate is also beneficial for tourism – another important sector in the Eurozone. A weaker Euro and a stronger dollar could attract more tourists from the US, which, again, is good for the economic cycle of the Eurozone.

But the verse side of weakening the euro is the risk of inflation. A weakening Euromeans thatgoods importedfromcountriesoutsidetheEurozoneare becomingmore expensive,whichcontributestoinflation.In addition,a weakereurocouldcausedamagetoeurozone companieswhoseoperationsdepend onimportedraw materialsorcomponents,becausetheincreaseintheircostscanreducetheprofitrateinthedomesticmarket,andintheexportmarkets.

The Euroisreportingtothedollarisdecliningforsometime,anditappearsthisisnottheendoftheroad.Butthecurrentexpectedparityisdifferentfrompreviouscases,asitisno longertoexpectaquickrecoveryoftheeuro exchange rate.The euroislikelyto remaincheapbecause ofthethreatoftheimpositionofdutiesandtherelocationofcompaniestotheUS.LoweuroexportsofgoodsandservicesfromtheEuropeanUnion,aalsotourism,butat the same timeleadstoincreasedpricesforimportedgoods,whichstimulatesinflationandreducesprofitsofEuropeancompanies.

At the same time,

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