How might the euro react if Trump wins the US presidential election?

As the US presidential elections approach on 5 November, global financial markets are on edge, anticipating potential shifts in US trade policy that could ripple across currencies and asset classes. 

While polls reflect a neck-and-neck race between Democrat Kamala Harris and Republican Donald Trump, betting markets have increasingly tilted in Trump’s favour, assigning him a 62% chance of winning.

A Trump victory could signal a return to protectionist trade measures, including a proposed 10% tariff on imports from Europe and a 60% tariff on Chinese goods. In retaliation, the European Commission might also respond with reciprocal tariffs on American imports. 

This sweeping protectionist stance could bring profound implications for the euro and other currencies worldwide, with analysts already weighing in on the potential market impacts.

How a Trump win could weigh on the euro

Analysts suggest that a re-imposition of broad US tariffs could strengthen the US dollar while adding downward pressure on the euro. 

“Tariffs have a direct influence on exchange rates”, said Michael Cahill, an analyst at Goldman Sachs, in a recent note. 

The investment bank anticipates that if Trump wins and Republicans gain control of Congress, it would heighten the case for a “hawkish Dollar response”, with tariffs potentially coupled with domestic tax cuts.

“The combined effect of higher tariffs and tax cuts could drive the dollar up, particularly if the US adopts a baseline tariff across the board,” Cahill explained.

This policy shift would also have repercussions for monetary policies on both sides of the Atlantic. Goldman Sachs’ chief economist, Jan Hatzius, estimated that a 10% across-the-board tariff could trigger a 150-200 basis point shift in the policy rate differential between the US and the Eurozone. 

“In the US, the impact would be hawkish, to the tune of 130bp, due to the inflationary impact of tariffs,” Hatzius said, while “the Eurozone would face a slightly dovish scenario, around -40bp, as the growth effects would outweigh any minor inflationary pressure from tariffs”.

The resulting policy divergence could weaken the euro by up to 3%, or even as much as 10% in a scenario with broader tariffs and tax cuts. 

As the euro recorded four consecutive weeks of losses, ING’s FX analyst Francesco Pesole noted that its recent underperformance has been driven more by economic data divergence than by electoral risk, with the US dollar gaining strength due to robust consumer spending and upward growth revisions in the US.

The euro would need to fall another 2% from its short-term fair value of 1.08 for Trump-related risks to be considered a major factor, Pesole explained.

Beyond the euro, Trump’s proposed tariffs could spark volatility in other currencies, particularly those tied to commodity exports and emerging markets. ING analysts highlight that the Australian and New Zealand dollars could see larger fluctuations within the G10 group, while the Mexican peso and several Asian currencies might be especially susceptible to trade-related shifts.

According to BBVA analysts, a Trump administration could introduce further economic and geopolitical uncertainty by reassessing US commitments to NATO and Ukraine, an outlook that could put additional pressure on the euro.

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A potential challenge for Europe’s economy and the ECB

If Trump wins the US election and implements his aggressive tariff policies, the euro is expected to face a prolonged downward trend against the dollar. Europe’s already faltering economic growth could suffer as retaliatory tariffs hit key export sectors, and the European Central Bank (ECB) could find itself constrained in responding effectively. 

The ECB may feel pressured to maintain lower rates or even cut them further if trade tensions weigh on growth – a scenario that could further erode euro strength.

In conclusion, a Trump-led White House with protectionist policies could place the euro in a precarious position, with analysts bracing for possible shifts in both trade and monetary policy that would be likely to favour the dollar at the euro’s expense.