EUR/USD: Further Dollar weakness supports Euro – Nordea

Nordea’s Ole Håkon Eek-Nielsen and Henrik Unell, argue that US outperformance has peaked and that global investors are overexposed to US assets. They see scope for further USD weakness as allocations normalize and European growth and investment pick up, which they say should support the Euro and allow more upside in EUR/USD over time.

US allocation rebalancing favors Euro

"Even after quite a heavy USD weakening over the last year, the USD is still not very weak in a historical context. The fairly low term premiums we are seeing are also telling us that so far, foreigners have not backed out completely. In other words there could be more to come."

"Let’s say that foreign investors as a group wanted to lower their allocation from 50% to 40%. As long as the US is running a deficit on their current account, foreign investors cannot sell their assets to US investors at an aggregated level. The only way this reallocation can happen is for the relative value of US assets to drop by 20%."

"Parts of the USD strength we have seen over the last two decades also comes from European weakness. The recovery after the debt crisis in Europe became slow with harsh austerity programs. Even countries outside the centre of the problem ended up running only small deficits."

"This is about to change with large investments going into defence and infrastructure. The last few months have made this need perhaps even more obvious. It seems likely to lead to higher growth, but given low unemployment, perhaps also higher inflationary pressure further out and higher interest rates."

"This development should support the alternative to USD and pave the way for more upside to EURUSD."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)