USD IS EXPECTED TO BE STRONGER IN 2017 THAN EUR
Over the past two years, the Euro has been trading against the US Dollar in a 14 cent range between 1.04 €/$ and 1.17 €/$ - determined by a zero % interest rate policy and exceptional monetary easing on both sides of the Atlantic Ocean. We found ourselves on a similar EUR-USD level at the end of 2015 as at the end of 2016, i.e. at the lower end of the trading range and with the same expectations regarding interest rate increases in the US and unchanged rate levels in Europe. Instead of the expected four rate hikes in the US, the Federal Reserve (Fed) actually delivered only one, which in fact weakened the US Dollar over the course of the year.
However, things are different for 2017: a new President with the promise of a major program for infrastructure as well as tax cuts has already catapulted up infl ation expectations and bond yields. This puts the Fed in the comfortable position of being able to increase interest rates in 2017 in several steps. At its last meeting in December, the Fed indicated they would raise interest rates an expected three times this year. ECB President Draghi, on the other hand, announced at the last ECB meeting that bond purchases would be extended until the end of 2017 with a volume of more than 60 billion € per month and that interest rates would remain at the same or even lower level until at least 2018. Regarding the economy, growth in the US has accelerated considerably and is expected to be more than 2% in 2017 and thus stronger than in the EU where 1.6% is anticipated. Due to this macroeconomic environment and the increasingly divergent central bank policies, we expect the Euro-Dollar to mark further lows this year and to fall below parity. Over the course of the year, however, the high US budget defi cit and the approaching debt ceiling could come into the view of the market again. In addition, the real economic results of "Trumponomics" are likely to only become visible after a certain period and to disappoint the current high expectations. The effects of Trump’s policy with regards to protectionism, immigration and the confrontation with China remain to be seen. Unless no new (or old) political crises in the EU arise, the Euro could benefi t from a weakening US Dollar towards the end of this year. Considering Brexit negotiations, political instability in Italy and Spain, as well as critical elections in France, Germany and the Netherlands, the extent of the Euro’s comeback is likely to be limited. We are expecting a low of 0.95 €/$ for 2017 and 1.08 €/$ at year end.