Predicting which way the dollar will go against the euro now that Donald Trump will become the 45th President of the United States is near impossible, according to economists at Deutsche Bank.
Writing in a special report on the implications of Trump’s victory in the euro area, a team led by Senior Economist Marco Stringa argues that the way the greenback will move against the euro — one of its most important crosses — in the medium term is “ambiguous.”
For a few weeks at least, Stringa et al argue that, the dollar can be expected to weaken against the euro.
“The uncertainty associated with the policy outlook for the US economy could push the EUR up in the short-term. For example, the usual negative correlation of the euro with US equities is one reason for a EUR/USD rally on the back of a Trump victory near term,” the team argue.
However, in the slightly longer term, which way the currency cross goes is up in the air. Deutsche Bank presents arguments for both a rally in the euro against the dollar, and a rally in the dollar on the euro. It all depends on which way Trump goes policywise in his first months in the job, once he takes office on January.
Here’s Deutsche’s argument to suggest that the dollar will jump:
“A big fiscal stimulus as observed in the early years of the Reagan administration, combined with higher rates and curve steepening would push the USD up. FX strategist Alan Ruskin thinks that this could have very favourable implications for FDI, the US narrow basic balance and ultimately the USD. But he also highlights that the market will rightly have some serious concerns about long-term fiscal sustainability and the longevity of stronger growth.”
And here’s why the bank believes it could be the euro that takes off, weakening the dollar:
“The rise in stimulus would result in bigger current account deficits and the exchange rate premium would also push the USD down. Doubts about the willingness of the Chinese Central Bank to continue purchasing Treasuries could emerge. Especially so if the new US administration maintains a strong rhetoric on trade and currency manipulations accusations. Such developments could accentuate a risk-off scenario, turning the FED towards a more dovish stance.”
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