The euro recently dropped below the critical $1.05 threshold against the U.S. dollar, a level it had maintained since December 2022. While it temporarily stabilized after the announcement of Scott Bessent as the U.S. Treasury Secretary under President-elect Donald Trump, fundamental weaknesses in the eurozone economy suggest that parity with the dollar may again be on the horizon.
The euro’s decline is partly a function of the dollar’s global strength, with markets overwhelmingly favoring the U.S. in recent months. Since the euro’s peak on September 27, it has fallen 5.5% against the dollar, while on a broader trade-weighted basis, it has only declined 1.6%, or 0.4% when excluding the dollar. Despite a 34% decline against the dollar since its 2008 peak, the euro remains only 2.3% below its all-time high on a trade-weighted scale.
A key metric contributing to the euro’s decline is the eurozone’s Purchasing Managers’ Index (PMI). In November, the composite PMI fell to 48.1 from 50 in October, signaling contraction. The services sector also weakened significantly, with its PMI dropping from 51.6 to 49.2. While these figures suggest a lack of growth momentum, the PMI has historically been a poor cyclical indicator. Over the past three years, it has signaled contraction in 17 of 36 months without substantial economic downturns, making it a less reliable measure of underlying economic activity.
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