LONDON (Reuters) – BNP Paribas (OTC:) Markets 360 expects the euro could recover against the dollar if there is a global recession, marking a break from past trading dynamics.
Sam Lynton-Brown, global head of macro strategy at the bank, gives a number of reasons for what he describes as one of the team’s controversial positions.
This includes using the dollar as a high-interest currency, which historically has not been the case, meaning the dollar is more vulnerable to falling if U.S. interest rates fall. Another factor is that the Federal Reserve is pushing rates further above their neutral levels than many other central banks.
In addition, Lynton-Brown said spreads on euro government bonds and peripheral countries in the currency bloc have become less sensitive to risk periods, which is positive for the euro.
WHY IT’S IMPORTANT
Euro/dollar is the most actively traded currency pair in the $7.5 trillion per day global currency market, and the drivers of this direction are being followed by investors worldwide.
IMPORTANT QUOTE
“If the US were to make a hard landing, that would make us even more bullish on the euro/dollar,” Lynton-Brown said.
CONTEXT
The base case of BNP Paribas Markets 360 is an economic soft landing.
It forecasts that the eurodollar will rise to $1.15 by the end of 2025, implying a gain of just over 3.5% from current levels around $1.11.
A Reuters poll recently predicted that the euro will trade around $1.12 in a year.
WHAT’S NEXT
The US Federal Reserve is widely expected to cut interest rates on Wednesday for the first time in four years and could even deliver a half-point cut. Speculation about an excessive cut has already hurt the dollar and any sign that the US economy is slowing faster than expected (particularly in the labor market) could fuel recession concerns.
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