Why is the Euro Rising Against the US Dollar?

Context:

This analysis is based on the recent shift in the euro-dollar exchange rate. Initially, the euro weakened after Donald Trump’s election victory, but it has since staged a significant recovery against the US dollar by March 17, 2025.

1. Initial Euro Weakening: Post-Trump’s election win on November 5, 2024, the euro weakened due to expectations of US economic growth from promised tax cuts and deregulation, driving investor money towards the US and strengthening the dollar.
2. Shift in US Policy: Trump’s early presidency (since January 20, 2025) focused on tariffs and federal budget cuts instead of tax reductions, dampening US demand and economic activity, leading to a weaker dollar.
3. US Economic Outlook: The OECD projects a halved US GDP growth rate (from 2.4% in 2024 to 1.2% in 2026), causing a negative wealth effect, declining stock markets, and lower bond yields, prompting investors to shift funds away from the US.
4. EU Economic Recovery: The EU’s GDP growth is expected to rise (0.7% in 2024 to 1.2% in 2026), boosting investor confidence in European markets and increasing demand for the euro.
5. Exchange Rate Dynamics: Higher demand for euros among Americans compared to dollar demand among Europeans has strengthened the euro, with the exchange rate recovering from 1.0277 USD (post-inauguration) to 1.0919 USD by March 17, 2025.
6. Monetary Policy Impact: Weaker US growth may lead the US Federal Reserve to cut interest rates, reducing returns on US bonds, while the European Central Bank’s stance remains a key factor to watch.
7. Implications for India: A weaker dollar has strengthened the Indian rupee (from 87.5 to 86.5 against the dollar by March 18, 2025), affecting trade and forex reserves, a critical point for India’s economic policy.

Link To The Original Article – https://indianexpress.com/article/explained/explained-economics/why-is-the-euro-rising-against-the-us-dollar-9892369/