According to Bloomberg, strategists at Bank of America and LBBW are concerned that a growing policy divergence between the US Federal Reserve and the European Central Bank could put significant pressure on the euro.
The European currency is expected to dive as much as 8% and hit parity with the US dollar, weighed down by the divergence in policy paths between the two major central banks.
Last year, the euro fell to parity with the greenback due to the energy crisis. This time around, experts attribute such a gloomy projection to the regulators’ diverging approaches to monetary policy.
Moritz Kraemer, chief economist at LBBW, is the most pessimistic expert among those surveyed. The analyst predicts that the euro could plunge to $1.01 by 2025. "The dollar would just go through parity like a hot knife through butter" if the US regulator keeps its monetary policy tight, while the ECB eases, he assumed.
According to strategists from Bank of America, the euro could come back to parity with the dollar if the ECB delivers three quarter-point interest rate cuts. In case of a new energy shock, Europe’s common currency could come under more pressure and take another nosedive.
However, traders believe such a bleak scenario is unlikely. Markets are pricing in only a 15% chance of the euro weakening to parity with the US dollar in the next 12 months.
