The strong US dollar is hard to resist, and the euro against the US dollar has hit a new low since 2022

After experiencing a year of a strong dollar, the dollar remains strong at the beginning of 2025. The market expects the Federal Reserve to cautiously cut interest rates, while the European Central Bank is anticipated to cut rates multiple times in the coming year, leading to further weakening of the euro against the dollar.

On January 2nd, Thursday, during trading hours in the Eastern Time, the euro against the dollar briefly fell below 1.0230, hitting a low not seen since November 2022, with a daily drop of over 1.2%. At the same time, the dollar continued to rise. The ICE Dollar Index (DXY), which tracks the dollar against a basket of six major currencies including the euro, rose above 109.50 during early trading, reaching a high not seen since November 2022, with a daily increase of nearly 1%.

Commentators believe that the decline of the euro is due to concerns that the export-oriented economies of the eurozone will be impacted by U.S. trade tariffs following the rise of Trump, who threatens to impose tariffs. Additionally, there are expectations that the European Central Bank will be more aggressive in cutting rates than the Federal Reserve. Furthermore, the unstable political situation in Germany, the eurozone's largest economy, adds downward pressure on the euro.

The Federal Reserve previously indicated that, due to the U.S. inflation rate still being above the Fed's long-term target of 2% and the domestic economy remaining strong, it will be more cautious in cutting rates. The number of first-time unemployment claims in the U.S. last week, released on Thursday, decreased to 211,000, a new low in eight months, reflecting a robust and resilient labor market.

In contrast, the market has strong expectations for the European Central Bank to cut rates in the face of potential tariff impacts on the eurozone economy. Media reports indicate that market pricing shows traders currently expect at least four cuts of 25 basis points by the European Central Bank in 2025.

Additionally, media reports state that Russia has ceased natural gas supplies to European countries via Ukraine starting January 1st, raising concerns among traders about Europe facing an energy crisis. The interruption of gas supplies means that Central European countries will be forced to procure more expensive gas from other sources, while the region's winter reserves are being depleted at the fastest rate in years, exacerbating gas supply pressures.

Meanwhile, due to serious differences over fiscal and tax policies, the ruling coalition of the German federal government is heading towards division, necessitating early elections next month.

Nearly two months ago, German Chancellor Olaf Scholz announced the dismissal of Finance Minister Christian Lindner, citing a lack of "trust-based cooperation." Subsequently, the Free Democratic Party announced its withdrawal from the coalition government formed with the Social Democratic Party and the Green Party, leaving Germany in a minority government situation.

More than two weeks ago, on December 16th, during a trust vote in the Bundestag viewed as an attempt to pave the way for early elections and seek re-election, Scholz failed to gain majority support from lawmakers. According to German law, the Federal President can dissolve the Bundestag based on the Chancellor's recommendation within 21 days and hold new elections within 60 days.

On December 27th, last Friday, German Federal President Frank-Walter Steinmeier announced the dissolution of the Bundestag, the lower house of parliament, in Berlin, and plans to hold new Bundestag elections on February 23, 2025, to determine the new German Chancellor. Steinmeier stated at the press conference that Germany "needs a government capable of taking action," and the next federal government will face significant challenges, with "problem-solving becoming the core content of politics." Last month, Wall Street Journal mentioned that historically, the situation where the euro is equal to the dollar is extremely rare. Due to factors such as Trump's tariffs, the sluggish economy in the eurozone, and the strengthening of the dollar, market analysts see the possibility of the euro falling to a parity level of 1:1 against the dollar.

According to a research report from Huatai Securities last month, the euro to dollar exchange rate may approach or even exceed the parity level in the coming months, as in the short term, the widening macro policy divergence between the eurozone and the United States may further suppress the performance of the euro, while the medium to long-term growth potential in Europe is also significantly lower than that of the United States. Additionally, if the new U.S. government fully raises tariffs, it could have a greater impact on the economic conditions in the eurozone.

Adam Button, the chief currency analyst at ForexLive in Toronto, recently commented that in terms of economic growth, the dollar should have no rivals by 2025. Before the U.S. economy truly falls into trouble, the dollar is the only choice