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Trump policy nudges euro toward parity with U.S. dollar

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Euro is expected to hit parity with the dollar

Economists expect the euro to fall to or even below parity with the U.S. dollar next year. That would mean the currencies had a 1:1 exchange rate.

The euro is used by 20 of the 27 nations in the European Union: Austria, Belgium, Croatia, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.

The currency most recently hit parity with the dollar in 2022, for the first time in two decades, before rebounding.

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Now, euro parity is “back on the cards,” James Reilly, senior markets economist at Capital Economics, wrote in a research note Nov. 11.

“The euro has suffered more than most in the wake of Trump’s victory and we doubt that will let up anytime soon,” he wrote.

As of 10 a.m. ET on Friday morning, 1 euro equaled about $1.06. That’s down about 3% from roughly $1.09 as of market close on Election Day.

The ICE U.S. Dollar Index (DXY) was also recently on a winning streak, Reilly told CNBC. Last week marked the eighth straight week of gains in the index, an “extreme run” that had only happened three times since 2000, Reilly said.

Travelers can try to take advantage of these currency dynamics by delaying a purchase until next year. For example, a European hotel or tour that allows you to book now for 2025 but pay later lets you defer the expense — understanding, of course, that it’s not a guarantee the euro will continue to weaken against the dollar.

Tariffs, interest rates and a strong economy

Tariffs and trade policy are major factors influencing euro-USD currency dynamics, economists said.

Trump has floated broad tariffs on global trading partners.

On the campaign trail, he proposed tariffs of 10% or 20% on all imports, which would include those from the European Union. He vowed Monday to impose an additional 10% tariff on China, and 25% tariffs on all products from Canada and Mexico, on his first day in office, signaling his willingness to implement import taxes.

The ultimate scope and magnitude of tariff policy are unclear, however.

The euro has suffered more than most in the wake of Trump’s victory and we doubt that will let up anytime soon.

James Reilly

senior markets economist at Capital Economics

Tariffs on Europe could reduce demand for its exports, causing Europe’s economy to weaken and the euro to lose value, economists said.

Interest-rate differentials also have a large influence on relative currency movements, economists said. They expect the interest-rate spread between the U.S. and eurozone to widen due partly to tariff impact.

Tariffs are expected to “be inflationary for the U.S.,” Reilly said. Those import taxes are paid by U.S. businesses, which generally pass their higher costs onto consumers.

U.S. Federal Reserve officials may keep interest rates higher for longer to bring inflation back to their long-term target. Meanwhile, economists expect the European Central Bank to keep cutting rates.

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Tariffs on the eurozone would probably lead the ECB to cut rates further, in a bid to prop up the European economy, creating a widening rate differential that “pretty dramatically” favors the dollar, said McKenna of Wells Fargo.

There are other factors, too.

For one, the U.S. economy has “held up a lot better than anyone has been expecting” over the past year or two, in stark contrast with Europe, Reilly said.

Also, financial markets dislike uncertainty, McKenna said.

If question marks around Trump administration policy unsettles markets in the short term, investors would likely seek out safe-haven assets denominated in U.S. dollars, such as U.S. Treasury bonds, thereby strengthening the dollar, McKenna said.

Of course, there’s a risk Europe retaliates with its own tariffs or somehow penalizes Americans by raising certain consumer prices, such as airfares, Reilly said.

“We don’t think that will happen,” he said. “We think Europe wants as free trade as it can.”

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Why your paycheck is slightly bigger

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Why your take-home pay could be higher

If you’re starting 2025 with similar wages to 2024, your take-home pay — or compensation after taxes and benefit deductions — could be a little higher, depending on your withholdings, according to Long.

“When all the tax brackets go up, but your salary stays the same, relatively, that puts you on a lower rung of the ladder,” he said.

The federal income tax brackets show how much you owe on each part of your “taxable income,” which you calculate by subtracting the greater of the standard or itemized deductions from your adjusted gross income.

“Even if you make a little more than last year, you could actually pay less in tax in 2025 compared to 2024,” because the standard deduction also increased, Long said. 

For 2025, the standard deduction increases to $30,000 for married couples filing jointly, up from $29,200 in 2024. The tax break is also larger for single filers, who can claim $15,000 in 2025, a bump from $14,600.  

‘It ends up nearly balancing out’

Tax Tip: 401(K) limits for 2025

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Student loan payments could lead to a tax break

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There’s one upside to your student loan payments: They might reduce your 2024 tax bill.

The student loan interest deduction allows qualifying borrowers to deduct up to $2,500 a year in interest paid on eligible private or federal education debt. Before the Covid pandemic, nearly 13 million taxpayers took advantage of the deduction, according to higher education expert Mark Kantrowitz.

Most borrowers couldn’t claim the deduction on federal student loans during the pandemic-era pause on student loan bills, which spanned from March 2020 to October 2023. With interest rates on those debts temporarily set to zero, there was no interest accruing for borrowers to claim.

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But interest on federal student loans began accruing again in September of 2023, and the first post-pause payments were due in October of that year.

By now, borrowers could again have interest to claim for the full tax year’s worth of payments, experts said.

“All borrowers should explore whether they qualify for the deduction as it can reduce their tax liability,” said Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit that helps borrowers navigate the repayment of their debt.

Student loan interest deduction worth up to $550

The student loan interest deduction is “above the line,” meaning you don’t need to itemize your taxes to claim it.

Your lender or student loan servicer reports your interest payments for the tax year to the IRS on a tax form called a 1098-E, and should provide you with a copy, too.

If you don’t receive the form, you should be able to get it from your servicer.

Depending on your tax bracket and how much interest you paid, the student loan interest deduction could be worth up to $550 a year, Kantrowitz said.

There are income limits, however. For 2024, the deduction starts to phase out for individuals with a modified adjusted gross income of $80,000, and those with a MAGI of $95,000 or more are not eligible at all. For married couples filing jointly, the phaseout begins at $165,000, and those with a MAGI of $195,000 or more are ineligible.

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Op-ed: Here’s why estate planning is a gift for your family

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Estate planning isn’t about focusing on your demise, one advisor says; it’s about taking control and making decisions that ensure your loved ones are cared for.

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