Will the U.S. dollar weaken further as the economy slows? What will its value be compared to the Euro by spring 2024? Our analyst tackles those key currency questions and more.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Dave Adams, Head of G10 FX Strategy at Morgan Stanley. And today I'll be talking about our views on the US dollar. It's Friday, December 8th at 3 p.m. in London.
The US dollar has fallen about 4% since it peaked in October and has retraced about half of its gains since July. We think this correction should be faded and we're affirming our call for Euro/Dollar to fall back to parity by the spring of next year, meaning the US dollar will rise a further 8% versus the Euro.
This is a controversial and out of consensus call, but we think the market is still underpricing weakness in Europe and strength in the U.S., and a continued widening in growth and rate differentials should weigh on the pair.
A lot of investors claim that the US dollar should weaken further as the US economy slows from its growth rate this summer. We agree US growth is likely to slow, but by far less than investors think. Our US economics team thinks the US growth will be about 1% stronger than consensus estimates, with the biggest gap for data leading into the second quarter of next year. This is a dollar-positive outcome.
We also hear from investors a lot that weakness in Europe is fully priced, but we respectfully disagree. Sure, there's a lot of cuts priced in for the European Central Bank, but not as much as there should be once the ECB more formally acknowledges that cuts are coming.
The real risk here is that markets begin to price in ECB rate cuts below the long-run estimate of the neutral rate of 2%, and in a world where the ECB is cutting, this is a real possibility.
A fast and deep cutting cycle in Europe would sharply contrast with the Fed, whose rhetoric continues to emphasize higher for longer, a view amplified by strong domestic growth. Divergence in economic data between Europe and the US should keep the euro falling versus the greenback.
Now, I'm the first to admit that an 8% move in a few months time is a pretty big move and moves that large don't happen that often. If we look at options pricing, the market is pricing in an even lower risk of such a move compared to historical frequencies. And it's worth remembering that large moves do happen. Eurodollar fell 10% in a four month window two different times last year. So while this call may be bold and buck consensus, we think the fundamental story still holds.
Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.
The Growth Outlook for China’s Tech Sector
What’s Next for Money Market Funds?
The Path Ahead for Natural Gas and Shale
Will Global Oil Markets Surprise In 2024?
Are These Gen AI’s Next Big Winners?
Will Anti-Obesity Drugs Disrupt the MedTech Industry?
Andrew Sheets: Why 2024 Is Off to a Rocky Start
Can Japanese Equities Rally in 2024?
New Year, New Investment Themes?
2024 U.S. Autos Outlook: Should Investors Be Concerned?
End-of-Year Encore: Macro Economy: The 2024 Outlook Part 2
End-of-Year Encore: Macro Economy: The 2024 Outlook
End-of-Year Encore: 2024 Asia Equities Outlook: India vs. China
End-of-Year Encore: An Early Guide to the 2024 U.S. Elections
Andrew Sheets: Credit Markets Take a Sunny View
Will Falling Rates Mean Lower Home Prices?
Michael Zezas: Why Geopolitics May Matter More in 2024
Will the Fed’s Pivot Favor Bonds Over Equities?
Mike Wilson: Does the U.S. Equity Rally Still Have Steam?
Economic Roundtable: What’s in Store for ’24?
Create your
podcast in
minutes
It is Free
The emPOWERed Half Hour
Now, What’s Next?
Access and Opportunity
At Scale: A Sustainability Podcast