In six months, Goldman Sachs thinks the euro will reach parity with the US dollar.
In currency markets, “parity” is when two currencies have the same value, or a 1:1 exchange rate.
The euro has fallen considerably over the last year and is currently at around 1.05 to the dollar. The euro hasn’t been at parity with the dollar since late 2002.
In a note to clients on Friday, Goldman’s Robin Brooks wrote that while the euro went “sideways” against the dollar following the ECB’s QE announcement, the firm sees the impending change in US monetary policy and portfolio outflows from Euro area residents as drivers of the latest leg lower in the euro against the dollar.
We … update our forecast to 1.02, 1.00 and 0.95 in 3, 6 and 12 months (from 1.12, 1.10 and 1.08 previously), as well as 0.85 and 0.80 at end 2016 and end 2017 (from 1.00 and 0.90), respectively. We therefore expect more downside in the near term, with the expected removal of “patient” at next week’s FOMC a key catalyst. In the longer term, we continue to believe that EUR/$US will significantly undershoot our GSDEER measure of fair value (around 1.20), reflecting diverging growth and monetary policy outlooks.
So not only does Brooks see the euro at parity with the dollar in just six months — and the euro trading below equal value to the dollar in a year — but over the next couple years Goldman expects the euro to fall to record lows against the dollar.
And as for the recent action in the dollar rally and the euro decline, Brooks says that the divergent forecasts on economic growth and monetary policy — slower growth and looser policy in Europe against stronger growth and tighter policy in the US — the EUR/USD trade “just isn’t stretched.”
“If anything, it seems to us that the market continues to play catchup with the strong Dollar theme,” Brooks added.
In a separate note to clients on Friday, Goldman equity strategist David Kostin said the dollar’s rally “dominated” discussions the firm had with clients last week.
Investors are concerned about the impact of the strength of the USD on S&P 500 earnings growth and stock market performance. Historical returns and our earnings model indicate that direct impacts of a stronger dollar on index-level equity performance are small, but indirect impacts could be larger should USD appreciation weigh more heavily on economic growth, particularly in the US. We recommend US stocks with high domestic sales
And for some perspective, here is the history of the euro against the dollar, giving you a great picture of just how far and how fast we’ve seen the euro fall this year.