(Bloomberg) -- The euro is on track to cap its worst month in over a year, blighted by the prospect that US trade tariffs will hit the region’s already battered economy.
The common currency is down about 3% in November to $1.0575, just off a two-year low reached earlier this month. That’s the biggest monthly slide since May 2023.
The euro has fallen out of favor amid investor concern that Europe’s economy will suffer if Donald Trump imposes tariffs on US imports, potentially leading policymakers to cut interest-rates more aggressively. Signs of stagnating growth and political turmoil in Germany and France, the bloc’s two biggest economies, have also contributed to the selling.
“Europe is now a consensus short,” said Luca Paolini, chief global strategist at Pictet Asset Management. “You have policy fragmentation, very weak growth and all the risk involved with Russia and Ukraine.”
While the dollar has surged since Donald Trump’s election victory, the euro has been the worst performer among Group-of-10 currencies. That’s largely due to expectations the European Central Bank will lower borrowing costs by 150 basis points through the end of 2025, roughly double the amount forecast for the Federal Reserve.
This week, the common currency got some relief from hawkish ECB comments and the fact that Trump didn’t mention Europe in his latest round of tariff threats, instead targeting Canada, Mexico and China.
Appetite for selling the euro also diminished after it quickly recovered from a fall below $1.05, a key level for traders. And risk reversals suggest market sentiment toward the currency is improving, while December has typically been a good month for the euro due to year-end outflows from the dollar.
“The market already has a low opinion of the euro zone economy so it’s hard to see significant downside for the euro for now,” said Michael Pfister, FX strategist at Commerzbank.
Still, investors are bracing for more losses next year on mounting signs the economy is struggling. Euro-area business activity unexpectedly shrank in November, and inflation in Germany failed to accelerate as economists expected.
Hedge funds and other leveraged investors increased their bets on a weaker euro to the highest in three years, according to the latest CFTC weekly data, and a growing number of strategists expect it to fall to parity versus the dollar.
“There is no tariff risk in the price, the euro level is only reflecting the divergence in monetary policy between the ECB and the Fed,” said Abdelak Adjriou, fund manager at Carmignac. “Frankly, the dynamic is not good for Europe.”
--With assistance from Vassilis Karamanis and Alice Atkins.
©2024 Bloomberg L.P.