The currency value of the US dollar should continue to be less than its potential strength.
Geez, alright, let's break down the current state of the EUR/USD exchange rate in a casual, Pal laid-back kinda way.
C'mon, you know how Trump started that trade war thingy on April 2? Yup, that kicked off! Since then, the Euro's external value has surged like a rocket, man, from 1.08 to 1.14 dollars. It's even gone as high as 1.14 since the start of the year – crazy, right? The yield on ten-year Treasuries has been creepin' up, too, from 4.17% to 4.46% in just two months.
The S&P 500 and the Dow Jones are still feelin' the heat, hoverin' about 3% and 6% below their January highs, respectfully. But European indices, like the Euro Stoxx 50 and the Dax, are chillin' close to their all-time highs. So, American investments ain't exactly the dream they once were, huh? But hey, is this trend or just a correction? We've been here before, and we know the Yanks don't bow out easily.
Remember when we talked about the International Monetary Fund (IMF)? They've been wrong more often than Aunt Mabel's cake recipes, but their predictions on exchange rate stability are always laughable! Check out this long-term Euro-Dollar exchange rate thingy since the end of Bretton Woods – it's always had some wild gyrations!
If you draw a line through the tops and one through the bottoms since 1970, you'll get this funnel, buddy. The average value nowadays is 1.42 dollars, which means the Euro's undervalued against the Dollar – whoa, did you catch that? Let's take a peek at some numbers that typically matter in exchange rates. They suggest that the demand for Euros will outstrip the supply of Dollars, so let's talk about a stronger Euro.
First, the current account surplus of the Eurozone ain't going nowhere – it's expected to remain about 3% of GDP, while the US expects a deficit of the same scale. You can guess what that means – a massive demand for Euros and a similar supply of Dollars.
Next, European policy is like a diet compared to American fiscal policy – the Euro is lookin' lean and mean, while the Dollar is bloated and gorging on bonds like a never-ending feast. The Eurozone's budget deficits are expected to be much slimmer in the coming years, which is good news for the Euro.
Both factors have made little impact on the dollar's exchange rate in the past, 'cause the American capital markets have been the bee's knees for years. But things are changin' now – with the trade war heatin' things up, the Yanks are seein' some inflation, man! Meanwhile, deflationary effects are prevailin' in the Eurozone, so the European Central Bank (ECB) has the wiggle room to lower interest rates further. The Fed? Not so much.
The vibe in bond markets is feelin' European these days. Euro-denominated bonds are lookin' smoooth, whereas American ones (Treasuries) are starin' at a surplus of supply due to Uncle Sam's party spendin'. But over on the European side, the supply of Euro-denominated government bonds is growin' at a much slower pace.
AACTUALLY, some analysts are predictin' that the EUR/USD could reach 1.60 dollars by the 30s and hit a peak of 1.85 dollars a few years later. WHOA! But hey, remember – it's all just a game and subject to lots of factors, dude! Keep your chin up and your eyes peeled on this one!
The current surging of the Euro's external value could indicate a shift in investing trends, moving away from American businesses towards European ones, given the Euro's undervalued status against the Dollar as revealed by the long-term Euro-Dollar exchange rate. With the Eurozone's budget deficits expected to be much slimmer and the ECB having the wiggle room to lower interest rates further, this trend might continue in the finance world.
