Three reasons for a stronger Dollar
The Dollar has been weakening for many months and has depreciated significantly against the Euro over the past twelve months. Euro investors who invested in the U.S. currency clearly felt the impact: Their annual returns were in some cases significantly dampened by the Dollar's weakness. What's next for the exchange rate? Many market observers expect the Dollar to remain weak. DWS has a different view. "We are sticking to our euro/dollar target exchange rate of 1.15 at the end of 2021," says Stefanie Holtze-Jen, Chief Currency Strategist at DWS, citing three reasons why the Dollar is pointing to a recovery.
1. The growth gap between the U.S. and the Eurozone is likely to widen further
The stronger fiscal stimulus under new U.S. President Joe Biden is expected to provide a special boost to the U.S. economy. USD 1.9 trillion is to be included in the aid package to alleviate the massive damage caused by the Corona pandemic. Having recaptured the Senate, the Democrats, with their slim majority in the House of Representatives, can now introduce legislation along their lines. Due to Joe Biden's conciliatory way of speaking, the market interprets positively that because of the economic situation, proposals that burden the markets, such as the feared tax increases, should not be expected in the foreseeable future. "This massive support, the more market-friendly stance of the Democrats together with the already higher growth potential of the U.S. economy and a more flexible labor market should mean that the upturn in the U.S. will be much more dynamic than in Europe," Holtze-Jen expects. The gap in economic growth between the Eurozone and the U.S. is therefore likely to widen further.
2. U.S. lead the way in vaccination
In its efforts to end the Covid-19 pandemic, the Eurozone seems to be lagging behind the U.S. The vaccination process – so far at least – has been much slower in continental Europe than in the U.S. Until the end of January, six percent of the population in the U.S. has already been vaccinated, three times as many people as in Europe. If the current pace were to be maintained, around 60 percent of the population in the U.S. would be vaccinated by August 2021. In continental Europe, by contrast, it would take until early 2022 to reach that mark. "If this scenario materializes, it would further widen the growth gap between the U.S. and Europe and tend to put additional pressure on the Euro," Holtze-Jen says.
3. Changing interests of U.S. policymakers and the European Central Bank
The political change in the U.S. should mean, that there will be no more pressure on the Dollar from politicians, as it happened under Donald Trump's presidency. During his term in office, Trump had massively propagated a weaker Dollar and thus put the Federal Reserve under pressure. The new U.S. Treasury Secretary and former Federal Reserve Chair Janet Yellen is not following this course. She is firmly in favour of the Dollar's value being determined by free trade on the foreign exchange market.
At the same time, the European Central Bank continues to comment on the Euro's soaring value. It is now planning a more detailed investigation of the Euro's appreciation against the Dollar since the beginning of the pandemic. The focus will be on whether different stimulus measures are responsible for the exchange rate development. European Central Bank council members such as Klaas Knot pointed out that the European Central Bank has instruments such as interest rate cuts to counter the Euro's appreciation. On the currency side, things could thus look much better for Euro investors who invest in Dollar assets in 2021 than they did last year.
Sabina Diaz Duque
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