Euro and British pound tumble against U.S. dollar as markets brace for Trump return

The euro and British pound tumbled to multi-month lows against the U.S. dollar on Thursday, as the fresh trading year kicked off and investors geared up for the return of Donald Trump to the White House this month.

The euro was 0.33% lower against the greenback at $1.032 shortly before 1 p.m. in London, hitting its weakest level since November 2022, while sterling dropped 0.78% to $1.242, an eight-month low.

Optimism around the U.S. economy and equities was in focus as markets reopened following disrupted trade over Christmas and the New Year. Wall Street stock futures were higher amid declines in Europe and the Asia-Pacific while the U.S. dollar index — a comparison against a basket of currencies — ticked 0.25% higher.

"Already [U.S.] growth has kept outpacing forecasts as consumers and companies have shrugged off the impact of high interest rates, with the unemployment rate remaining low," Susannah Streeter, head of money and markets at Hargreaves Lansdown, said in a Thursday note.

"Investors are hopeful that a goldilocks scenario will be the story of 2025, amid promises of lower taxes and the deregulation under a second Trump presidency."

While some improvement in growth is expected in 2025, forecasts for Europe remain comparatively downbeat, particularly with Trump's threat of sweeping tariffs and a potential trade war clouding the picture.

Revised figures published last week showed the U.K. economy stagnated in the third quarter, while economists warn that political instability and structural issues will drag on Germany, France and other euro zone nations this year.

Those outlooks have significantly pulled on currency markets in recent months, with inflationary risks from Trump's tariff proposals expected to lead to fewer Federal Reserve interest rate cuts in 2025, while the European Central Bank and Bank of England appeared slightly more dovish at their December meetings. Higher interest rates are generally supportive of the domestic currency.

"The greenback continues to find support from expectations of USD-bullish Trump policies and fading conviction around the Fed's rate-cut trajectory for 2025," Mohamad Al-Saraf, FX and rates strategy associate at Danske Bank, said in a Thursday note.

Key data ahead in assessing the robustness of the U.S. macro narrative includes Thursday's jobless claims and Friday's ISM manufacturing report, along with next week's non-farm payrolls, Al-Saraf said.

He added that the euro was likely to fall back to U.S. dollar parity in the medium-term, a benchmark it last hit in November 2022. However, Al-Saraf said that market pricing for less than two quarter-point rate cuts this year may prove overly hawkish and could trigger a dollar correction along with any negative U.S. data surprises.