LONDON — The euro is headed to parity over the course of the next 12 months, regardless of whether Marine Le Pen is victorious in the French presidential election in May.
While the single currency should catch something of a bid if the election goes as currently forecast and Le Pen loses in a run-off to centrist candidate Emmanuel Macron, any rise will just delay the inevitable fall of the euro to a $US1 valuation, according to strategists from Deutsche Asset Management, the money management arm of German finance giant Deutsche Bank.
In the unlikely event that Le Pen does win the election, it would simply “accelerate” the currency’s downward spiral, a person with knowledge of the £607 billion asset manager’s forecasts told Business Insider.
However, the key takeaway is simple; the euro is headed to parity with the dollar. The driver of that slump will not be political risks, but rather the increasing differential between interest rates on both sides of the Atlantic, as the US Federal Reserve continues to tighten policy in response to the strengthening US economy.
By contrast, the European Central Bank looks an awfully long way from moving away from the negative interest rate policy it has pursued since 2014. This divergence should push the dollar higher, in turn subduing the single currency.
Broadly speaking, higher interest rates push a currency’s value up in relation to others. This is because if interest rates are higher in the US than Europe, dollar-denominated investments in the US create higher returns. That, in turn means more people want dollars against the euro, with that demand pushing the currency higher.
Soon after Donald Trump’s election as the US president, several major institutions made forecasts of euro-dollar parity early in 2017, including French lender Societe Generale. While none of those forecasts materialised — with the euro hovering around $US1.06 for much of the quarter — many banks have simply pushed back the forecast of parity, citing the expectation of at least two further Fed hikes in 2017.
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See the latest EUR-USD movements here.