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The euro and dollar are inching closer to parity, with analysts suggesting the milestone could be reached as soon as this month, coinciding with Donald Trump’s inauguration. Currency strategists from Bank of New York Mellon and Mizuho predict further euro weakness driven by economic divergence and looming trade tensions.

Euro Weakness Deepens
The euro has dropped over 7% against the dollar since September, recently hitting $1.0226, its lowest level in more than two years. Options markets reflect heightened expectations, with a 40% probability of parity being reached this quarter and a surge in trades targeting the level last week.

“We’re not far off, so it could happen very quickly,” said Geoffrey Yu, senior strategist at BNY Mellon, who anticipates euro bearishness peaking around the Federal Reserve and European Central Bank (ECB) meetings later this month.

The euro has only reached parity with the dollar a handful of times since its introduction in 1999, typically during periods of significant economic strain in Europe compared to the U.S. The most recent instance was in 2022, amid energy crises triggered by the Russia-Ukraine conflict.

Catalysts for Parity
Analysts expect Trump's return to the White House on January 20 to serve as a potential trigger. His administration’s trade policies could disproportionately affect Europe, whose export-driven economies already face challenges from slowing growth and concerns over energy security.

Meanwhile, monetary policy divergence adds to the pressure. The ECB is expected to cut its deposit rate to 2.75% at its next meeting, while the Federal Reserve maintains its rates in the 4.25% to 4.5% range. This growing gap favors dollar strength, with BNY reporting the euro as the most underheld currency in two decades.

Short-Term Reprieve, Long-Term Uncertainty
While the euro experienced a slight rebound this week due to dollar weakness, many traders remain bearish. Jane Foley, head of FX strategy at Rabobank, believes that confirmation of Europe’s benign inflation trends could accelerate the ECB’s rate cuts, further pressuring the euro.

Adding to the uncertainty are energy supply disruptions in Europe, exemplified by the halt in Russian gas flows last week. Political instability in key European economies also weighs heavily, amplifying investor caution.

Looking Ahead
Some analysts, including those at JPMorgan Chase, expect parity could be reached later in the first quarter. Wells Fargo projects a similar outcome but leans toward the second quarter as a more likely timeframe.

For now, traders are watching key economic data from Germany and France, which have recently shown stronger-than-expected inflation figures. January could prove pivotal for the euro’s trajectory as markets adjust to shifting policies and geopolitical developments.