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The correction in the USD sparked by the late August publication of the minutes of the Fed’s latest policy meeting illustrated that the USD was ripe for a correction and the sensitivity of the USD to how the Fed may or may not fine tune its policy in the months ahead. However, economists at Rabobank expect the greenback to be in demand due to its safe-haven appeal and forecast EUR/USD at 1.16 in three months.

Key quotes

“While the EUR’s fundamentals have been boosted by signs of improved political coordination and by a perception that the Covid-19 crisis may have been better handled in the EU than in the US, this year’s drop in real yields in the US has been a key factor associated with the plunge in the value of the USD in recent months.”

“Looking ahead, yields will continue to be influenced by usual factors such as the growth outlook, new issuance of debt and demand for safe-haven assets in addition to inflation. Clearly, how the outlook for inflation pans out will have a significant implication for asset prices in the coming years. That said, although the USD’s weakness in recent months can be explained by changes in fundamental factors, we would argue that it is the intrinsic qualities of the USD rather than those of the US economy that define its safe-haven appeal. These qualities are likely to ensure that the USD will continue to be a strong recipient of safe-haven flows on any further sharp pullbacks in risk appetite.” 

“We look for EUR/USD to correct lower towards 1.16 on a three-month view.”

 

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