The U.S. dollar could very soon reach parity with the European Union’s common currency.
In the last two weeks, the euro has fallen 4% against the dollar, hitting $1.06, a level last seen 12 months ago.
“The sharp shift in expectations for U.S. interest rates and economic growth since the American presidential election has refueled the euro’s fall against the greenback. If the Federal Reserve increases rates, expectations are the dollar would rise further by drawing money to the U.S. looking for higher returns,” the Wall Street Journal explained.
The European Central Bank, meanwhile, "is showing few signs of a major shift in a monetary policy that has pushed rates into negative territory and includes a huge bond-buying program," the Journal noted.
The euro "also has to contend with a gantlet of coming eurozone votes that could increase power for the sort of populist parties that, many investors believe, embrace policies that could stymie growth," WSJ.com explained.
Following Donald Trump’s election, Citigroup said it had shifted its euro-dollar forecast “180 degrees.” The bank now predicts the euro will tumble to 98 U.S. cents in the next six to 12 months, the Journal explained. Last week, others joined the bank in predicting parity, the Journal said. The euro early Monday was near $1.0624.
The divergence of U.S. monetary and fiscal policy with the rest of the world “should be very beneficial to the dollar,” said Adnan Akant, head of currencies at asset-management firm Fischer Francis Trees & Watts. Akant now thinks that parity could be reached fairly soon. “Well, that’s only 7% to 8% away; yes, I would think so,” he said.
To be sure, Goldman Sachs Group Inc. noted the strong dollar and weak euro among its top trade recommendations for 2017 in a note to clients.
"In the U.S., events have moved in a U.S. dollar-positive direction, between the rising likelihood of fiscal stimulus, more protectionism and immigration controls, all of which add up to a more inflationary mix and tighter-than-otherwise monetary policy setting," according to a team led by Co-Head of Global Macro and Markets Francesco Garzarelli.
"In Europe, ongoing uncertainty over the Brexit process will likely weigh on the pound, while the slew of elections, including the Italian political fallout after the constitutional referendum on Dec. 4 and general elections in France, Germany and the Netherlands, will weigh on the euro," Goldman wrote.
The strategists are targeting 10 percent upside in the U.S. dollar relative to an equal-weighted basket of the euro and pound, and would exit the position if the trade went against them by 5 percent. This would entail the euro falling to parity against the greenback, and the pound sinking to 1.14 on a 12-month horizon, Bloomberg reported.
The primary risks to the trade would be tapering from the European Central Bank and a delay in triggering Article 50 to begin the Brexit process.
(Newsmax wire services contributed to this report).
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