(Photo : pixabay.com)

• The euro is experiencing a significant decline, potentially due to the impact of Donald Trump's U.S. election win.
• A weak euro raises the cost of imports, leading to inflation, but also makes exports cheaper, benefiting Europe's industries.
• Other major U.S. trading partners' currencies have also been affected, with the Mexican peso and Korean won experiencing losses.
• Despite the euro's weakness, the European Central Bank (ECB) is in a better position than in 2022, and the trade-weighted euro is not looking so weak.

The euro, the world's most actively traded currency pair, has been experiencing a significant decline, falling to one-year lows and sparking discussions about the possibility of it hitting the $1 mark. This depreciation is largely attributed to the potential impact of Donald Trump's U.S. election win, which raises the prospect of a hike in tariffs that could deal a fresh blow to the euro zone economy. The euro has slumped nearly 5% from more than one-year highs in September when a weakening economic outlook stopped it in its tracks.

The possibility of the euro hitting $1 is not far-fetched. Parity is just 6% away and the euro has traded below that level before - once in the early 2000s and again for a few months in 2022, when U.S. interest rates were rising faster than euro zone ones as Europe grappled with the energy price surge that followed the war in Ukraine. For traders, the $1 mark is a key psychological level. A fall below here could exacerbate negative euro sentiment, leading to a further depreciation.

Implications of a Weak Euro

The implications of a weak euro are multifaceted. On one hand, it raises the cost of imports, which can lead to prices of food, energy, and raw materials rising, aggravating inflation. On the other hand, a fall in the euro makes exports cheaper - good news for Europe's automakers, industrials, and luxury retailers, and for individuals or investors with overseas incomes. This is particularly beneficial for Germany, long-considered Europe's export engine, which has suffered from a number of headwinds including a weak Chinese economy.

The euro is not the only currency affected by tariff worries. Many currencies of major U.S. trading partners have been hit hard in the past six weeks. The euro has lost 4.75%, while the Mexican peso has lost nearly 5% and the Korean won has fallen 5.4%. The euro actually rallied 6% over the course of Trump's last term, but fell by nearly 6% in the six weeks following the 2016 result, before recovering.

The ECB's Stance and Global Economic Impact

Despite the euro's weakness, not everyone has a bearish long-term view of the currency. Many banks see parity as possible, but not necessarily probable. Faster interest rate cuts from the European Central Bank (ECB) than in the United States would be negative for the euro, but on the positive side, that easing could also support the currency longer term by boosting the economic growth outlook.

The ECB is in a better position than the last time the euro weakened sharply - that was in 2022 and inflation was surging so the euro's drop below $1 added pressure on the central bank to hike rates. Fast forward to today and inflation is trending lower. There are other reasons why a fall to $1 would not be a huge worry for the ECB. The ECB pays more attention to how the euro performs against a basket of the currencies of the euro area's main trading partners. Viewed this way, it's not looking so weak. The trade-weighted euro is down around 1.25% in the past week and well above levels seen in 2022.