Julius Baer Predicts US Dollar Weakness as Temporary Drivers Fade
Julius Baer forecasts a medium-to-long-term decline for the resilient US dollar as temporary cyclical drivers fade, targeting 1.15 EUR/USD in three months.
The US dollar continues to demonstrate resilience in global markets, trading at elevated levels with the DXY index hovering around 101.8 points and the EUR/USD exchange rate moving near 1.12. However, a recent review by Swiss investment bank Julius Baer assesses that the primary drivers bolstering the American currency are temporary, and that the medium-to-long-term trend is expected to reverse in favor of dollar depreciation.
Temporary Drivers and Market Pressures
David A. Meier, an economist at Julius Baer, explains that current support for the dollar relies on a combination of transient cyclical factors. Among these are rising oil prices driven by tensions in the Strait of Hormuz—which positively impact the dollar since the USA became a net energy exporter—alongside capital flows into safe-haven assets during stock market shocks, the economic growth advantage of the American economy, and aggressive expectations regarding Federal Reserve interest rate policy.
According to Meier, these factors are expected to gradually fade and make way for structural negative trends that will force a decline in the exchange rate. The bank's forecast points to a moderation of oil prices in the medium term, which will reduce support for the US currency. Concurrently, the growth advantage of the USA is losing its impact, while economic activity in the eurozone shows signs of recovery and is expected to converge subsequently. Additionally, expectations for further interest rate hikes by the Fed have peaked, and the bank estimates that the markets currently price in overly aggressive hikes that will need to be downwardly revised.
Long-Term Outlook for the Euro
In the longer term, persistent current account deficits in the USA and a decline in demand for government bonds among investors seeking to diversify portfolios will continue to weigh on the currency.
Despite political and fiscal uncertainty in France and the surge in government bond spreads there, Julius Baer remains committed to an optimistic forecast regarding the European currency.
Headquartered in Zurich, the bank sets a target price of $1.15 per euro within a three-month horizon, and a target of $1.20 per euro over a 12-month horizon. This represents a more aggressive forecast than consensus market expectations, yet one the bank asserts is based on solid structural economic fundamentals.
