Europe Reacts to Trump's Election: "Am I Shaking?"... Euro and Stock Markets Fall Together

Euro-Dollar Exchange Rate at $1.0595... Lowest in 1 Year
STOXX600 Down 1.98%... Largest Drop in 3 Months
ECB Urges Preparations for Trump Election

As Donald Trump, the President-elect of the United States, prepares to re-enter the White House, the value of the euro and European stock markets have sharply declined. This is due to concerns that Trump’s “bomb tariff” pledge will damage European exports, reduce the competitiveness of European companies, and negatively impact growth and inflation.

On the 12th (local time), in the international foreign exchange market, the euro-dollar exchange rate was hovering around $1.0615. At one point that day, it fell to $1.0595 per euro, marking the lowest level since November last year.

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The euro has dropped about 3% over five trading days since Trump’s election. Meanwhile, the dollar’s value is on the rise. The dollar index surged to as high as 106.18 that day.

According to Bloomberg News, ten banks including Barclays, ING, and Nomura International significantly reduced their call (buy) options on the euro last week. This contrasts with these banks’ more optimistic outlook on the euro over recent months.

Mark McCormick, Global Head of Foreign Exchange and Emerging Markets Strategy at TD Securities, described this as the “worst-case scenario imaginable” for the euro, forecasting that the euro-dollar exchange rate will fall to $1.03 by the time Trump takes office in January next year. He further predicted that the rate would then enter parity territory, where the values are nearly equal.

European stock markets are also falling one after another. The pan-European STOXX600 index dropped 1.98%, recording its largest daily decline in three months since early August. France’s Paris stock market CAC index plunged 2.69%. Germany’s Frankfurt DAX fell 2.13%, and the UK’s London FTSE closed down 1.22%.

Bloomberg expects the STOXX600 to record the worst performance against the S&P 500 since 1995 this year.

If Trump implements his pledge to introduce universal tariffs of 10-20%, Eurozone (20 countries using the euro) exports to the U.S. will be severely hit, and there are concerns that low-priced Chinese exports will flood the market, significantly reducing the competitiveness of European companies such as automakers. There is also a forecast that the interest rate gap between the U.S. Federal Reserve (Fed) and the European Central Bank (ECB) will widen.

ECB officials have also urged preparation for Trump’s return to the White House. Robert Holzmann, Governor of the Austrian National Bank, predicted that if Trump’s tariff policies are implemented, U.S. interest rates and inflation will remain high, and other regions will face inflationary pressures. He also noted that if the dollar and euro reach parity, it will affect import prices such as energy, making it more difficult for the ECB to achieve its 2% inflation target.

Olli Rehn, Governor of the Bank of Finland, emphasized Europe’s difficulties in responding to trade wars with the U.S. during Trump’s first term and warned, “If a trade war begins, Europe must not be unprepared as it was in 2018.”

Thomas Bieladeck, Chief European Economist at T. Rowe Price, said, “The rest of the world (excluding the U.S.) is under pressure,” adding, “It’s as if the growth of the rest of the world is being redistributed to the U.S. economy.”