Euro/usd: Why the euro could take revenge on the dollar in 2023?

(BFM Bourse) – The European currency has suffered against the dollar this year. But the European Central Bank’s monetary policy catching up with the US Federal Reserve could see the euro bounce back by 2023.

The royalties took a bit of a hit at the end of 2022. After rising above parity against the euro over the summer, it has lost ground in recent weeks and is currently trading at €0.9340.

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The fact remains that throughout 2022, the US dollar has weakened the eurozone currency, driven by Federal Reserve (Fed) rate hikes and safe-haven status. To the point of gaining 6% against the euro for the year.

The European currency is not an isolated case. The dollar rose against all major international currencies. The US dollar index (DXY), which measures the currency’s evolution against a basket across the Atlantic, is up nearly 8% in 2022.

The strength of the dollar may decrease

Could 2023 be the turning point? This is possible. In a survey published in mid-December by Bank of America, most managers surveyed believed the dollar was overvalued compared to the euro. Note that when this survey was published, the dollar was trading at a slightly higher level of 0.9489 euros.

“We see 2023 as a good year to diversify currency positions as the dollar should weaken,” said Vincent Manuel, chief investment officer at Indosuez Wealth Management. “The combination of a change in US monetary policy and a renewed appetite for risk will weigh on the dollar,” said SwissLife Asset Managers judge.

If the Fed raises interest rates further in the next few months, it will likely end its hike cycle in 2023. And it will carry this euro before the European Central Bank (ECB), which has to overcome its “backlog” to the American Central Bank.

A more aggressive ECB

Especially after the last meeting of the ECB in mid-December, there was an electric shock. Its president, Christine Lagarde, later made it clear to investors that the market does not expect rate hikes high enough to return euro zone inflation below 2% over a reasonable horizon. This has led many financial intermediaries to raise their “terminal rate” forecasts, ie the rate the ECB will reach at the end of this growth cycle. For example, Deutsche Bank increased from 3% to 3.25%.

“We expect policy interest rates to peak in June 2023 in the US and to rise for a longer period in Europe. Therefore, yield spreads will narrow. All this argues in favor of investments in the euro zone,” develops Professor Jan Viebig. -Oddo director of investments at BHF, on a final note.

“In 2022, the dollar and the Swiss franc benefited from a flight to supposedly stable currencies after the supply shock. We believe that the latter will end in 2023. If this assumption is correct, then the safe currencies of 2022 – the dollar and the Swiss franc – should correct again and the euro should appreciate,” adds the financial intermediary.

No euro for $1.30

In particular, faced with the determination shown by the ECB and Christine Lagarde, the UBS bank revised its forecasts for the euro-dollar on December 20.

If the Swiss bank expects the dollar to recover against the euro in the coming months, it would be short-lived. UBS expects the euro at the end of March at 96 cents, currently at $1.02, versus $1.06 in its previous forecast. According to the agency’s calculations, the single European currency will then rise to $1.05 by the end of June, $1.07 by the end of September and $1.10 by the end of December 2023, a level the euro has not reached since April. 2022.

The bank believes the market may still be surprised by the magnitude of the Fed’s rate hike earlier in the year, which could allow the dollar to strengthen slightly.

Nevertheless, the transition could happen from mid-2023. In the second half of the year, “markets may believe that the Fed is cutting interest rates, while the ECB will still be fighting inflation,” UBS expects. According to the agency, the euro zone’s trade balance, which clearly affects the euro’s strength, should improve during the year, as well as global growth.

“Taking all this into account, we expect a slight recovery of the Eurodollar, but an increase towards the fair value of 1.30 is unlikely in our opinion. A world with strong demand for European exports,” the Swiss bank develops.