Tactical: Opportunities in the euro, Norwegian krone, and Australian dollar
EUR: French political uncertainty has been a key factor weighing on the euro in recent weeks, but the new budget proposal from Prime Minister Lecornu has significantly reduced the risk of a government collapse and is likely to provide some stability in the near term, potentially until the next elections in 2027. This has brightened the euro’s outlook, and the single currency has begun to recover. We expect this rebound to continue as political risks subside, making the euro a more attractive alternative to the US dollar, in our view. Fiscal stimulus, particularly in Germany, is also likely to boost growth and the euro into year-end and 2026. We maintain our EURUSD forecast of 1.23 by June 2026, as the divergence in monetary policy outlooks should erode the US dollar’s yield advantage.
NOK: The Norwegian krone is one of Europe’s most growth-sensitive currencies and should benefit from any acceleration in European activity spurred by front-loaded fiscal expenditures in Germany and joint European defense spending. It also stands to benefit from decent carry, robust growth despite tariffs, and favorable global financial conditions as the Fed continues its easing cycle. Although the Norges Bank surprised markets with rate cuts in June and September, it has signaled that it would be cautious about reducing rates further. We see EURNOK reaching 11.0 by next September.
AUD: Given the Reserve Bank of Australia’s focus on the full employment part of its dual mandate, the latest softer-than-expected jobs data is likely to see the central bank cut rates in November. However, any upside surprises in the third-quarter inflation data could still delay this cut, and we continue to see a growth recovery under way. We continue to expect AUDUSD to reach 0.70 in the first half of next year and 0.72 by September 2026, supported by a narrowing AU-US cash rate differentials, a better-than-expected fiscal position in Australia, and the broadening acceptance among investors of the AUD’s diversification properties.
Strategic: Review currency allocations and consider hedging US dollar exposure implicit in US assets
As governments around the world pursue different strategies to manage debt, the effects are likely to manifest in currency markets. That means it is an important time for investors to ensure strategic currency allocations are appropriate for their personal situations (see “A practical guide to currency allocation” for more).
Many investors have accumulated more US dollar exposure than needed, driven by attractive opportunities in US capital markets, relatively higher interest rates, and the dollar’s reputation as a “safe haven.” Currently, G10 foreign investors hold an estimated USD 14tr in unhedged dollar positions.
But with further dollar weakness ahead, investors should reassess their currency mix, review dollar allocations, and consider hedging or rebalancing strategies to bring portfolios into better balance.
One option for reducing dollar exposure is to switch US dollar bond holdings to those denominated in euros, as we hold an Attractive view on the currency. We also like investment grade bonds, including EUR investment grade. The outright level of yields in euros (over 3%) is appealing, fundamentals generally remain solid, and we expect limited credit quality deterioration in the medium term.
Currency hedging overseas equity exposures can also help close currency gaps. For sophisticated investors, currency forwards, options, and structured solutions can provide flexible exposure, though these instruments introduce additional risks such as leverage and margin calls.
