The Dynamics of the EUR/USD Exchange Rate in an International Geopolitical Context and the Prospects of a Return to the 1:1 Parity

Abstract

This paper investigates the dynamics of the EUR/USD exchange rate in the context of increasing international geopolitical tensions and assesses the prospects of a return to the 1:1 parity. In recent years, global financial markets have been exposed to a series of major geopolitical shocks, including the Russia–Ukraine conflict, prolonged economic sanctions, trade tensions between the United States and China, and disruptions in global supply chains. These developments have significantly increased uncertainty and heightened volatility across capital and foreign exchange markets. The EUR/USD exchange rate plays a pivotal role in the international monetary system, reflecting both monetary policy differentials between the Federal Reserve and the European Central Bank and investors’ responses to geopolitical risk. Periods of elevated geopolitical stress are often associated with higher exchange rate volatility and renewed discussions regarding parity convergence. The study aims to analyze how major geopolitical events influence the volatility of the EUR/USD exchange rate and alter market expectations. By combining theoretical insights with quantitative analysis of time series data, the research provides evidence on the transmission channels through which geopolitical risk affects currency markets. The findings contribute to a better understanding of exchange rate behavior under heightened global uncertainty and offer relevant implications for investors and policymakers. CZU: 339.743:327; JEL: F31; F51; G15