Economists at Deutsche Bank remain dollar bears beyond the near-term and see scope for a move towards 1.30 in the EUR/USD pair next year.
Key quotes
“We remain structural dollar bears and see EUR/USD heading towards 1.30 by next year. Crucially, however, not for the reasons many talk about. To start with, we do not believe that US currency reserve status has been a big driver of the dollar move so far. It would take an active and extremely large re-allocation away from dollar reserves to weaken the dollar. However, custody holdings at the Fed have fully recovered their COVID losses in recent months.”
“We would not hang our hat on a US reserve story ahead of a historic US election. A Biden victory would likely cement, rather than reverse, the dollar’s reserve status. We don’t believe inflation debasement is a big driver of the dollar either, it is notable that inflation breakevens in the US have not moved more than other currencies – there is no idiosyncratic inflation risk premium being added to the greenback.”
“The dollar bear case has to be driven by two things: a widening US current account deficit and an unwind of the private-sector dollar overweight both in terms of asset allocation as well as extremely low hedge ratios. A shift here accompanied by a widening current account deficit would be the clearest shift of a bigger shift in the US basic balance which has historically been the fundamental driver of dollar trends.”
More: EUR/USD to trade above 1.25 as the greenback will weaken 20-25% – Nordea
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