Anticipation of the risk of the euro slipping against the dollar is rising in financial markets after last week’s rate cut and the scenario that a Donald Trump presidency could spark a global trade war. Days after Trump suggested that US tariffs could target Europe as well as China and other countries, European Central Bank President Christine Lagarde warned that any barriers to international trade would pose a “downside risk” to the already affected Eurozone economy. On Thursday (10/17), the ECB cut interest rates for the second time in a row and fueled expectations for even more aggressive cuts in the future. The combination of the above factors sent the euro down, for the third consecutive week of losses against the dollar. A 1:1 euro-dollar rate is certainly a possibility if Trump wins and goes full steam ahead with his tariff hike plan. 
Hedge funds have increased their bets against the euro since Oct. 15, to a two-month high, according to Commodity Trading Commission data released on Friday (18/10). In the options market, traders are also increasing bets against the common currency. A next-month hedge index – or how expensive it is to buy options that benefit from a currency’s gains versus those that bet on its weakness – is almost the most negative for the euro in three months, showing the trend for bets on the fall of the euro. Short-term bearish options for the euro are centered in the $1.08-$1.07 range, according to data from the Depository Trust & Clearing Corporation. Interest in protection against a slide to $1.05 is on the rise, while bets on 1:1 parity are a small fraction of total volumes, for now. The Chinese yuan, Mexican peso and Japanese yen are usually seen as the main lightning rods for new US trade restrictions, but Europe’s ailing economy leaves the euro vulnerable. US tariffs could curb global trade as growth slows and central banks cut interest rates. 
The reduction of interest rates
Money markets give a 30% chance the ECB will cut by half a point at the last meeting of the year and are fully priced for quarterly cuts at each meeting until April.
The euro rose 0.3% against the dollar to $1.0864 on Friday (10/19), in its third week of losses, its longest streak since June. A second Trump term and a tariff war could force the ECB into further action to keep the currency weak to remain competitive.
