Donald Trump's electoral upset has breathed new life into thebet that diverging economic paths will drive the euro toward paritywith the dollar for the first time since 2002.

Traders see about a 45% chance the European currency will sinkto $1 in the next year, about double the probability assigned aweek ago, data compiled by Bloomberg show. The president-elect'spledges to boost spending and cut taxes are fueling speculationthat economic growth will accelerate, pushing the Federal Reserveto raise interest rates more quickly. That sentiment sent a gaugeof the dollar to the strongest since February on Monday, while theeuro fell to about $1.07, touching its lowest since 2015.

For Deutsche Bank, the world's fourth-biggest currency trader,the election results are enough to jolt the euro out of a rangeit's been stuck in for months and push it below $1 in 2017. Callsfor parity crumbled this year as the Fed cut back on the number ofexpected rate hikes, even as the European Central bank continued toadd unprecedented amounts of stimulus. Now Trump's win isrekindling the wager that drove the dollar to back-to-back annualgains in 2014-2015, for its biggest two-year rally since theeuro's 1999 debut.

“Divergence is back,” George Saravelos, a strategist at DeutscheBank in London, wrote in a report dated Nov. 13. “The Trump victoryhas changed things.”

Saravelos forecasts the euro will drop to $1.05 by year-end and95 cents by the end of 2017, which would be its weakest since June2002. The consensus on Wall Street is still for a stronger euro.The shared currency will climb to $1.11 by the end of 2017,according to the median forecast in a Bloomberg survey.

The dollar's strength in recent days runs counter to theconsensus before the presidential election — that a Trump victorywould spur a rout in the U.S. currency as investors anticipatedfinancial-market volatility that might cause the Fed to delay rateincreases. The focus turned instead to the potential for economicstimulus. The Republican's pledges include spending from about $500billion to $1 trillion over a decade on roads, bridges andairports.

Traders assess about a 92% probability to a Fed hike next month,up from 80% a week ago, according to data compiled by Bloombergbased on fed funds futures. The calculation is based on theassumption the effective federal funds rate will trade at themiddle of the new range after the central bank's next increase.Higher rates tend to boost the appeal of holding money in a givencurrency.

Yield Appeal

Deutsche Bank forecasts the dollar will rank among thehighest-yielding currencies in the Group-of-10 nations if the Fedraises rates next month. The extra yield on U.S. 10-year notesrelative to German equivalents is already the highest since atleast 1990.

Against a backdrop of a strengthening U.S. job market, hedgefunds and other large speculators signaled confidence in thedollar's outlook heading into the election. They raised net bullishbets on the greenback to about 221,000 contracts in the weekthrough Nov. 8, the highest since February, according to CommodityFutures Trading Commission data.

“We see parity sometime in the first quarter of 2017,” saidEnrique Diaz-Alvarez, chief risk officer at foreign-exchange brokerEbury in New York. “Trump's policies of pushing fiscal expansion onan economy that is near full employment are going to be met by afaster pace of hikes than there would have been otherwise.”

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