Baku, Azerbaijan, Jan.27
By Leman Zeynalova, Anvar Mammadov – Trend:
Staring from mid-January, euro began to rapidly rise against dollar amid reports about progress in the forming of German government January 12, 2018.
The exchange rate of euro against dollar rose by almost 4 percent over the last two weeks, reaching its three-year high.
Cautious statements made by Mario Draghi, President of the European Central Bank, didn’t stop euro’s appreciation either. Euro’s exchange rate continued to rise. As of 17:38 (GMT +4 hours), Jan.26, euro appreciated against dollar by 0.35 percent, reaching 1.244 USD/EUR.
Experts hold different views regarding the future of euro’s rate. Analysts of UK-based consulting company Capital Economics believe that euro will slip back against dollar in 2018.
“We expect the euro to slip back against the dollar in 2018, even though we have revised our end-year forecast up slightly from $1.10/€ to $1.15/€. This revision reflects the fact that the exchange rate has risen a long way in recent months, to around $1.20/€; and the economic outlook in the euro-zone has become even brighter than we had expected,” said the company.
The company analysts believe that for now, financial markets seem determined to view any news as positive for the euro, and as negative for the dollar. “But we don’t think this will last.”
“However, we suspect that the euro will begin to weaken again before long. This is largely because we expect the dollar to stage a recovery,” the analysts believe.
The bulk of the appreciation of the euro this year reflects dollar weakness rather than euro strength: sterling has appreciated more against the dollar than the euro (5.1 percent versus 3 percent), according to Capital Economics.
“While factors other than monetary policy expectations have been driving the dollar for some time, we think that will change as expectations for the US Federal Reserve Board of Governors (Fed) to raise rates begin to increase,” said the company.
However, the consulting company’s expectations for dollar in 2019 are pessimistic.
“We expect 2019 to be a different story. Our view is that the yield of 10-year Treasuries will drop back to 2.5%, as the Fed’s tightening cycle ends earlier than expected amid signs of slowdown in the US economy. Against this backdrop, we forecast that the dollar will fall back against the euro (to $1.25/€),” said the company.
This is while John Hardy, Head of FX Strategy at Saxo Bank, told Trend that he expects US dollar to weaken in 2018.
First of all, explaining the current rise in euro exchange rate against dollar, he said that this is a party of an ongoing repricing of euro higher, as the European Central Bank (ECB) is seen as exiting from quantitative easing (QE) this year, while the US Fed is seen as likely to continue to hike rates very slowly.
As well, over recent years, the EU has run an increasingly large current account surplus that is positive for euro, added Hardy.
“As we look ahead, there is some concern that the US dollar will weaken due to hostile US trade policy, which could see China seeking to avoid the use of US dollars in its trade with other trading partners, and therefore less interest from central banks in Asia and globally in growing their USD reserves any more (this was a key factor keeping the USD stronger than it should have been for the last 20 years). This all comes at a time when the US budget deficit promises to worsen materially due to Trump’s just passed tax reform,” he noted.
As for expectations regarding euro’s rate, Hardy said it could yet go higher toward 1.27-1.28 in the first quarter of 2018.
“I am beginning to adjust the endpoint for this rally higher to above 1.3000 if the US Fed doesn’t sound concerned on the inflation front or on the status of the US dollar at the January and March Federal Open Market Committe - FOMC meetings,” he said, adding that the March meeting is very important, as it is the first meeting of Jerome Powell at a press conference as Fed chairman.
Hardy went on to add that the pace of Fed rate hikes is a key factor, as Fed that eventually moves to hike rates much faster than currently expected could both support the US currency while also tightening global liquidity, which is linked to the strength/weakness of the US dollar as well.
Regarding the possible effect of rising euro on Azerbaijani currency manat, he said the appreciation of euro is less relevant to manat rate than the general rise in crude oil prices and the status of the USD, as both are more linked to pressure on oil prices, as oil is effectively Azerbaijan’s external currency.
Follow the authors on Twitter: @Lyaman_Zeyn @Anvar_Mammadov