The Federal Reserve has been priming the market for tighter monetary policy as the US economy has continued to improve.
Meanwhile, the European Central Bank has been easing policy further as economic activity stagnates and prices fall. In fact, the latest effort by the ECB to stimulate the economy flopped, and that has economists predicting even looser monetary policy.
All of this has resulted in a stronger dollar and higher US interest rates and a weaker euro and lower eurozone interest rates.
Goldman Sachs strategists see the euro tumbling all the way to $US1 from the $US1.29 level today.
“The euro has weakened by 8% versus the US dollar since May,” Goldman Sachs’ David Kostin wrote in a new note to clients. “We expect the downward gravitational pull on the EURUSD will persist for the next several years until it trades at parity versus the dollar by year-end 2017. From a spot of 1.29, our economists forecast the euro will depreciate by 7% vs. the dollar during the next year (to 1.20) and fall by 22% to parity by 2017.”