shifted against the euro after the Fed's June 2021 meeting, in which policymakers signaled an increasingly aggressive pace of policy tightening. Interest rate differentials vis-à-vis the U.S. While many analysts remain skeptical that parity will be reached, at least persistently, pockets of the market still believe that the euro will eventually weaken further. "Our forecasts imply EUR/USD will go back up to 1.10 not down to parity in coming months." The case for parity "All of these things give the same message: the dollar is too high," Saravelos concluded. dollar is now the "world's most expensive currency," while the German lender's foreign exchange positioning indicator shows that dollar long positions against emerging market currencies are at their highest since the peak of the Covid-19 pandemic. "We don't believe Europe is about to enter a recession and European data – in contrast to the consensus narrative – continues to outperform the U.S.," Saravelos said.ĭeutsche Bank's valuation monitor indicates that the U.S. He argued that we are now at a stage where further deterioration in financial conditions "undermines Fed tightening expectation" while a great deal more tightening remains to be priced in for the rest of the world, and Europe in particular. The dollar index is up around 8% since the start of the year, and in a note Tuesday, Deutsche Bank said the "safe haven" risk premium priced into the greenback was now at the "upper end of extremes," even when accounting for interest rate differentials.ĭeutsche Bank Global Co-Head of FX Research George Saravelos believes a turning point is close.
"For the Fed's part in all this, I believe the Fed would become alarmed by a move to the 0.98-1.02 range in EURUSD, and this extent of USD strength vs the EUR, and I could see a move to this area in EURUSD causing the Fed to pause or slow its tightening campaign." Dollar 'too high' "It would not be surprising to see ECB policy inertia continue if the central bank is faced with the worst possible combination of higher recession risk in Germany and additional sharp rises in prices (i.e.
#EXCHANGE RATES USD TO EUR FULL#
"We have not seen evidence of a large build-up in EURUSD short positions on the part of leveraged funds in the data we track, which leads us to believe that the EUR is weak because of a deterioration in underlying core flows."Ī move to parity between the euro and the dollar, Gallo suggested, would require ECB "policy inertia" over the summer, in the form of rates remaining unchanged, and a full German embargo on Russian fossil fuel imports, which would lead to energy rationing.
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