The US dollar index this week hit a 14-month high and is up close to 9% from its February low. This renewed burst of strength after a steep fall last year seems at odds with the mounting US twin current account and fiscal deficits.
While we believe these deficits will eventually weigh on the USD, and the normalization of European monetary policy will support the euro, in the near term we expect EURUSD to fall even further to 1.10 over three months:
- Earlier this year we expected more synchronized global economic growth. Instead the US has widened its lead over its peers. Early readings had the US economy growing 4.1% in the second quarter, almost double the pace of the Eurozone. Meanwhile, earnings growth in the single market looks on track to hit 7% for the second quarter, lagging a 25% rise in the US. While a Eurozone recovery is likely later this year, the upswing is taking longer to materialize.
- Global trade tensions have deepened beyond our initial expectations. This has benefited safe-haven currencies, including the US dollar. And brinkmanship over trade is unlikely to subside at least until after the US midterm elections in November. The dollar, along with the yen, has been the main beneficiary of risk-aversion arising from the trade conflict.
- Financial turmoil in Turkey has dealt an unexpected blow to euro sentiment. While Turkey accounts for just 1.6% of Eurozone exports, the problems on the Eurozone's doorstep appear to have rekindled worries over Europe's long-term growth and earnings prospects. The spread between US and Eurozone 10-year yields remains close to a record 257 basis points.So we are raising our forecast for the dollar over the coming year. We expect EURUSD to fall to 1.10 over three months and rise only slightly from 1.14 at present to 1.15 in the next six months, versus a previous forecast of 1.25. We also expect the dollar to remain stronger against sterling, at USD 1.30 in six months, versus 1.42 previously.
To read more, please contact your advisor for a copy of our recent publication, Greenback back en vogue.
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