Wall Street banks expect the euro to climb past $1.20 soon

Wall Street is betting that the euro rally still has legs. The currency has already surged over 12% this year, and big-name banks now say that’s just the beginning.

According to the Financial Times, Goldman Sachs, JPMorgan, and UBS all believe the euro will push beyond $1.20 in the next few months as global investors keep hedging against the U.S. dollar and interest rate cuts from the Federal Reserve weigh on greenback demand.

Christine Lagarde, head of the European Central Bank, described the current surge as a “global euro moment.” And it’s not just because of stronger sentiment around the Eurozone economy. Analysts say part of the rally comes from growing unease with President Donald Trump’s economic agenda.

The euro even topped $1.19 this month, hitting a level not seen in four years before dipping slightly to $1.17. But traders and strategists say that dip isn’t the end, it’s just a pause.

Pension funds raise hedging bets as interest gap narrows

Peter Schaffrik, global macro strategist at RBC Capital Markets, said the massive repositioning away from the dollar is still in its early stages. “We’ve just seen the tip of the iceberg,” he said. “That’s at the helm of the dollar weakness we’ve seen, and there’s more to come.”

The surge in demand for the euro is being driven by investors using contracts to hedge their dollar exposure, and the movement has gained speed as big institutions, especially pension funds, start to ramp up those hedges from very low levels.

The cost of those hedges depends heavily on the interest rate difference between the U.S. and the Eurozone. With the Fed continuing to lower rates, that gap is narrowing.

Jackie Bowie, who leads Europe, the Middle East, and Africa at Chatham Financial, said, “As that interest rate differential closes, [hedging] potentially becomes more palatable to put in place.” When holding dollars becomes less profitable, hedging makes more sense, and that’s fueling more buying of the euro.

Forecasts are bullish. Goldman Sachs thinks the euro could hit $1.25 within a year. JPMorgan is aiming for $1.22 by March. UBS is calling for $1.23 before the end of this year. A survey compiled by Bloomberg shows most banks expect the currency to push past $1.20 by the third quarter of next year.

But that kind of appreciation isn’t without consequences. Stronger currencies hurt exporters, and Europe’s manufacturers are already feeling the squeeze. They’ve warned that a prolonged rally would cut deep into their profits.

Rising euro raises concern inside the ECB and among exporters

Inside the European Central Bank, the conversation is getting complicated. Tomasz Wieladek, chief European macro strategist at T Rowe Price, called $1.20 a “line in the sand.”

Luis de Guindos, who sits on the ECB’s rate-setting committee, warned back in July that anything above $1.20 would make things “much more complicated.”

The concern isn’t just about exports. A stronger euro puts downward pressure on inflation, which could force the ECB to consider cutting rates just to cool the currency down.

Not everyone inside the central bank is on edge, though. Dominic Bunning, who heads G10 FX strategy at Nomura, said a slow climb in the euro wouldn’t trigger alarm bells. He argued that if domestic demand stays strong, the appreciation could actually help by easing inflation pressures.

But he also made it clear that if the euro jumps too fast while demand weakens, “currency strength [would be] exacerbating disinflationary tendencies.”

Some banks are betting in the other direction. Citi, for example, expects the euro to drop toward $1.10 in the next 6 to 12 months. They say signs of a rebound in the U.S. economy could reverse recent trends. But most analysts aren’t buying it.

Instead, they’re pointing to what they see as a deeper change. A June survey from OMFIF, a think-tank focused on central banking, found that reserve currency managers plan to increase their euro holdings over the next couple of years.

Wieladek called it a structural move. “Euro appreciation is a structural story, as reserve currency managers begin to pivot out of the US and the Fed cuts rates,” he said. For now, Wall Street’s bets are clear.

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