LONDON (Reuters) – The euro fell to its lowest level in a year, reviving rumors that the currency could breach the $1 mark. Donald Trump’s victory in the US elections increases the prospect of a tariff raise, which could deal a fresh blow to the euro zone economy.

At around $1.05, the euro has fallen 6% from more than a year high in September, when a weakening economic outlook brought the currency to a halt.

Euro/dollar is the most actively traded currency pair in the world.

Here’s what’s driving the move towards the euro and what could happen in the future for the currency.

1. Could the euro reach 1 dollar?

It’s possible. Parity is just 5% away, and the euro has already traded below this level – once in the early 2000s and again for several months in 2022, when U.S. interest rates rose faster than eurozone interest rates as Europe struggled with the raise in energy prices that followed the war in Ukraine.

For traders, the $1 threshold is a key psychological level. Therefore, a fall below this level could deepen the negative sentiment in the euro area, leading to further depreciation.

Major banks including JPMorgan and Deutsche Bank (ETR:) believe that a drop to parity may occur, depending on the level of tariffs. Tax cuts could also raise U.S. inflation and limit Federal Reserve interest rate cuts, making the dollar potentially more attractive than the euro.

2. What does this mean for businesses and households?

A delicate currency usually increases import costs. This may lead to an raise in the prices of food, energy and raw materials, deepening inflation.

Inflation has declined rapidly since reaching double-digit levels two years ago, so the impact of the weakening currency on prices should not be a major concern for now. Most economists expect inflation to return to the 2% target next year after some volatility in delayed 2024.

Conversely, the fall of the euro makes exports cheaper – good news, for example, for European car manufacturers, industrial companies and luxury retailers, as well as for individuals and investors earning income abroad.

This is particularly positive for Germany. The German economy, long considered Europe’s export engine, has suffered from a number of headwinds, including a delicate Chinese economy.

3. Is the euro singled out?

Not necessarily. Many of the currencies of major U.S. trading partners have been hit demanding over the past six weeks by concerns about tariffs.

The euro lost more than 4.5%, the Mexican peso lost 6% and the Korean won fell by 5.4%. The euro actually rose 6% during Trump’s last term, but fell almost 6% in the six weeks after the 2016 results before recovering.

And look at the Japanese yen. This year it has fallen almost 10% against the dollar; the euro fell by more than half.

4. Is it really that bad?

Not everyone has a bearish long-term view on the euro. Many banks see parity as possible, but not necessarily probable.

Faster interest rate cuts by the European Central Bank (ECB) than in the United States would be negative for the euro, but the positive side is that easing could also support the currency in the longer term, improving economic growth prospects.

The euro zone economy grew by 0.4% in the third quarter compared to the previous three months, faster than forecast, which is positive for the euro. The collapse of the German government may also aid, potentially paving the way for spending to stimulate economic growth in the next term.

“Everyone is gloomy about Europe, and we understand that gloominess, but we can expect positive surprises,” said Edmond de Rothschild CIO Benjamin Melman, adding that he did not see a significant deterioration in the euro zone as a result.

5. What does this mean for the ECB?

The ECB is in a better position than the last time the euro weakened sharply – that was in 2022, and inflation was rising, so the euro falling below $1 increased pressure on the central bank to raise interest rates.

Fast forward to today and inflation is trending downward. There are other reasons why a drop to $1 would not be a substantial concern for the ECB.

The ECB is paying more attention to the behavior of the euro in relation to the basket of currencies of the euro area’s main trading partners. Looking from this side, it doesn’t look that bad. Last week, the trade-weighted euro fell by less than 1% and well above the levels recorded in 2022.

Economists also note that the pass-through of exchange rate changes to inflation is relatively diminutive, so the weakness of the euro should not hamper interest rate cuts for now.