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The dollar/euro exchange rate has two key determinants. The long-term dynamics is the one related to the US external deficit and accumulation of external debt; the short-term dynamics is the one related to the cyclical gap between monetary policies. The first points to a depreciation of the dollar, the second points to a resilient dollar in 2022, as analysts at Natixis note.

Factoring in the long-term and short-term dynamics of the EUR/USD  

“We currently have the following configuration: A rapid deterioration in US foreign trade due to the strong stimulation of domestic demand through expansionary fiscal and monetary policies. A faster return to full employment than in the eurozone. The cyclical recovery is taking place faster in the United States than in the euro zone following the COVID-19 crisis: this means that the US will return to full employment faster than the eurozone. We should therefore expect the expansionary monetary policies to end earlier in the US than in the eurozone.”  

“If tapering takes place from spring 2022 in the United States and from the end of 2022 in the eurozone, there will be a gap between the two countries’ monetary policies during 2022, with a more expansionary monetary policy in the eurozone. We should therefore expect: A long-term trend depreciation of the dollar; Interrupted in 2022 by the monetary policy gap between the US and the eurozone, as monetary policy will temporarily be more expansionary in the eurozone.”