The Euro to Dollar (EUR/USD) exchange rate has retreated to below 1.17 this week with an element of fresh dollar demand while a renewed increase in oil prices has hurt the Euro.
Deutsche Bank notes the short-term possibility of dollar gains if energy fears intensify, but remains bearish on the dollar over the medium term and is forecasting EUR/USD gains to 1.25 by the end of this year.
Deutsche considers that a key factor is that the dollar is still notably strong in historic terms.
According to the bank, the currency is still 16% above the long-term average value which gives scope for further net losses.
The bank considers that the period of US exceptionalism has come to a close which will weigh on the currency over the medium term.
There have been very strong US capital inflows over the past 2 years.
According to Deutsche a key point is that there does not need to be a “sell America” narrative for the dollar to retreat.
Even a more neutral trend for US flows would tend to curb dollar support while the US currency will be much more vulnerable if there are net US outflows.
