Perspectives Pictet: The dollar should rebound in the coming months
The euro rose sharply against the US dollar after a speech by Mario Draghi today. We still expect the US dollar to strengthen in the coming months.
We have previously mentioned that there was too much pessimism surrounding the US dollar. We see no reason to change our view. US activity is likely to remain robust in 2017, the recent weakness in inflation is unlikely to mark the start of a new downward trend, the market is underestimating the Fed’s desire to tighten financial conditions in the face of a strong labour market, and a fiscal boost to be ratified near the end of this year remains feasible, in our view. Consequently, the US dollar is likely to appreciate in the next six months.
We continue to expect a strengthening of the US dollar in the coming months, while the euro should correct, as the ECB is unlikely to move as fast as the market is expecting. Current EUR levels against the US dollar are not attractive from a tactical risk/reward perspective. This is confirmed by long-term real rate differentials, which do not back the recent rise of the euro against the US dollar. That said, we acknowledge that following the persistent rise in the EUR/USD rate, our current end-of-year forecast of USD1.06 per euro relies on a perfect alignment of a number of factors.