Never mind sterling: here comes euro-dollar parity

US presidential-elect Donald Trump’s shock election win has breathed new life into the bet that diverging economic paths will drive the euro toward parity with the dollar for the first time since 2002.

Analysts see about a 45 per cent chance the European currency will sink to $1 in the next year, about double the probability assigned a week ago, data compiled by Bloomberg shows. Mr Trump’s pledges to boost spending and cut taxes are fuelling speculation that economic growth will accelerate, pushing the Federal Reserve to raise interest rates more quickly. That sentiment sent a measurement of the dollar to the strongest since February on Monday, while the euro fell to about $1.07, touching its lowest since 2015.

For Deutsche Bank, the world’s fourth-biggest currency trader, the election results are enough to jolt the euro out of a range it’s been stuck in for months and push it below $1 in 2017. Expectations of parity disintegrated this year as the Fed cut back on the number of expected rate hikes, even as the European Central bank continued to add unprecedented amounts of stimulus. Now Mr Trump’s win is rekindling the wager that drove the dollar to back-to-back annual gains in 2014-2015, for its biggest two-year rally since the euro’s 1999 debut.

“Divergence is back,” George Saravelos, a strategist at Deutsche Bank in London, said in a report dated November 13th. “The Trump victory has changed things.”

Stronger euro

Mr Saravelos forecasts that the euro will drop to $1.05 by year-end and 95 cents by the end of 2017, which would be its weakest since June 2002. The consensus on Wall Street is still for a stronger euro. The shared currency will climb to $1.11 by the end of 2017, according to the median forecast in a Bloomberg survey.

The dollar’s strength in recent days runs counter to the consensus before the presidential election – that a victory for Mr Trump would spur a rout in the US currency as investors anticipated financial market volatility that might drive the Fed to delay rate increases. The focus turned instead to the potential for economic stimulus. The Republican’s pledges include spending from about $500 billion to $1 trillion over a decade on roads, bridges and airports.

Traders assess about a 92 per cent probability to a Fed hike next month, up from 80 per cent a week ago, according to data compiled by Bloomberg based on Fed funds futures. The calculation is based on the assumption the effective federal funds rate will trade at the middle of the new range after the central bank’s next increase. Higher rates tend to boost the appeal of holding money in a given currency.

Yield appeal Deutsche Bank forecasts the dollar will rank among the the highest-yielding currencies in the

group-of-10 nations if the Fed raises rates next month. The extra yield on US 10-year notes relative to German equivalents is already the highest since at least 1990.

Against a backdrop of a strengthening US jobs market, hedge funds and other large speculators signalled confidence in the dollar’s outlook heading into the election. They raised net bullish bets on the dollar to about 221,000 contracts in the week through November 8th, the highest since February, according to Commodity Futures Trading Commission data.

“We see parity sometime in the first quarter of 2017,” said Enrique Diaz-Alvarez, chief risk officer at foreign exchange broker Ebury in New York. “Trump’s policies of pushing fiscal expansion on an economy that is near full employment are going to be met by a faster pace of hikes than there would have been otherwise.”

– (Bloomberg)