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Why Is Euro So Strong Against Dollar | Erste Group

welcome to an update on Western market

research our topic today is the euro and

its strength now what are the reasons

behind that strength well we don't quite

know to beat to be honest the movement

during the last three months or so was

quite was very strong the euro

appreciated versus the dollar by about

7% at the same time the fundamental

picture didn't change too much so

already in June we knew that the ECB

would have to rethink its asset purchase

program and that the outcome would be

likely that asset purchases in 2018

would not be as high as in 2017 so that

was pretty clear at the same time for

the for the US the economy was weak in

q1 but in June there were already

significant signs that the second

quarter would be better this was

confirmed and now the third quarter

looks pretty good too so from this side

there weren't too many news but

nonetheless we saw the strong movement

in euro dollar and a pretty clear

confirmation that the current euro

dollar rate has decoupled from

fundamentals and RB was seen at the last

ECB council meeting last week where

during the the press conference of

President Draghi which were where he was

rather dovish and that more or less

communicated that it's significant time

to reduce their asset purchases and the

decision could be made or is likely to

be made in October but no fixed date we

saw diverging movements on financial

markets

so while yields German yields declined

which was in accordance with the tone of

the Draghi statement the euro gained

even more during these comments so this

already is a pretty clear indications

first of all that markets see it

obviously differently and we tend to go

more with the in this case at least with

the bond market which interpreted the

the tone of Draghi as as

and again we see this that Eurodollar is

not currently or is decoupled from

fundamentals currently so we're

currently at the level of 120 and

scratched even 121 last week where do

you see it going forward let's say till

the end of the year when we expect 115

so we expect the dollar to firm and the

euro to weaken the reasoning behind is

first of all our assumption that

fundamentals will play start to play a

bigger role again and here we think that

markets are expecting from the ECB too

much and from the Fed too little this

means that concerning the timing and the

extent of the reduction of asset

purchases we think the ECB would rather

disappoint my cat expectations means

they will be slower concerning the Fed

we think there's still one interest rate

hike this year very likely which

currently is only priced in by

significantly less than 50% so once this

evolves this is on the one hand we can

we connect factor for the euro and at

the same time a firming factor for the

dollar and that's why overall we expect

your dollar to move back to 115 by

year-end what do you think happens when

you're wrong let's say it rises even

further to 125 well if it was then the

outlook for the monetary policy in

Europe changes significantly because

that means the ECB would get a from the

expansion area environment a restricting

a restrictive factor means a stronger

euro and that would likely mean that

they would extend their asset purchases

even longer than they currently plan for

us it would mean lower long-term

interest rates longer then we then we

currently expect so that's very likely

since the ECB has made it quite clear

that they will consider the exchange

rate at their upcoming monetary policy

decisions for the eurozone economy I do

not think that at these levels we're

talking about you this would really

choke off

growth

from the export sector the the growth in

the recipient economy is the decisive

factor for for export growth but of

course a stronger exchange rate is a

dampening factor for export and it might

cost some tens of a percent that is

possible we will see how far it goes how

long it lasts but again the message is

clear we do I don't think that would

bring the expansion in the eurozone the

economic to up economic expansion the

years on to a halt but it could hurt

right now thanks for insights thanks for

your time thanks for your time see you

next week

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