UPSC CURRENT AFFAIRS – 19 March 2025

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Why is the euro rising against the US dollar?

Why in News:

The euro-dollar exchange rate fluctuations after Donald Trump’s election in 2024 highlight the impact of economic policies, investor sentiment, and global financial trends on currency valuation.

Introduction

Recently, the day of the U.S. Presidential election, the euro-dollar exchange rate stood at 1.0933. Following Donald Trump’s victory, the euro weakened, and by January 20, 2025 (his inauguration day), the exchange rate had fallen to 1.0277. However, by March 17, 2025, the euro had rebounded to 1.0919, nearly its pre-election level. This currency fluctuation highlights the impact of economic policies, investor sentiment, and global financial trends on exchange rates.

Understanding Currency Exchange Rates

Exchange rates reflect the relative demand for two currencies. Demand arises from:

Investments in stocks or bonds.
Tourism and spending in foreign economies.
Trade in goods and services.

If demand for euros exceeds demand for dollars, the euro appreciates (gains value), making it stronger against the dollar. Conversely, if the demand for dollars rises, the euro depreciates (loses value).

Why Did the Euro Depreciate After Trump’s Election?

Following Trump’s victory, markets anticipated that his policies would boost U.S. economic growth, making the U.S. dollar more attractive to investors. Key expectations included:

Tax Cuts & Deregulation – Increased corporate profits and economic productivity.
Business-Friendly Policies – Strengthened investor confidence in the U.S. economy.
Weak EU Economic Outlook – The Eurozone struggled with slow growth, political instability, and uncertain fiscal policies in key economies like Germany and France.

As a result, investors moved capital into the U.S., increasing demand for dollars, leading to the euro’s depreciation against the dollar.

What Led to the Euro’s Recovery?

By March 2025, two major factors contributed to the euro regaining strength:

Worsening U.S. Economic Outlook
- Instead of pro-growth policies, Trump focused on tariffs and federal budget cuts, which negatively impacted the economy.
- Trade tensions created uncertainty, discouraging investment.
- The OECD projected U.S. GDP growth to slow from 2.8% in 2024 to 2.2% in 2025 and 1.6% in 2026.
- Weaker economic prospects led investors to withdraw funds from the U.S., reducing dollar demand.
Improving Eurozone Growth Prospects
- European governments, led by Germany and France, shifted away from fiscal austerity to stimulus-driven policies.
- The OECD projected EU GDP growth to rise from 0.7% in 2024 to 1.2% by 2026.
- Investor confidence in Europe’s recovery led to increased capital inflows, strengthening the euro.

Future Outlook and Uncertainties

Despite the euro’s rebound, its future trajectory remains uncertain:

Will Europe sustain its economic momentum?
Will Trump’s trade policies stabilize or further weaken the U.S. economy?
Upcoming policy decisions, including:
- March 19: U.S. Federal Reserve’s monetary policy announcement.
- April 2: Trump’s expected announcement on reciprocal tariffs.

Impact on India

The euro-dollar fluctuations also influence the Indian rupee (INR):

Rupee vs. Dollar:
- As the dollar weakened, the rupee appreciated from ₹87.5/USD on February 6 to ₹86.5/USD on March 18.
- A stronger rupee lowers import costs, especially for crude oil, helping reduce inflation.
Rupee vs. Euro:
- As the euro strengthened, the rupee depreciated from ₹87.4/EUR on January 5 to ₹94.5/EUR on March 18.
- A weaker rupee benefits Indian exports to Europe, making them more competitive.

Conclusion

The euro’s recent fluctuations highlight the interplay of economic policies, investor sentiment, and global market trends in determining exchange rates.
While a stronger dollar initially weakened the euro, the reversal in economic outlooks shifted investor preferences, leading to a euro recovery.
The U.S. Federal Reserve’s monetary policy and Trump’s trade strategies will be crucial in shaping future trends, with global implications, including for India’s exchange rates, inflation, and trade balance.