The Euro has been under pressure since the start of the Iran conflict while the dollar has gained net support with the Euro to Dollar (EUR/USd) exchange rate sliding to 7-month lows around 1.1415 before a slight recovery.
Nordea notes the potential short-term Euro risks and potential dollar short covering, but still sees dollar gains as temporary given US fundamentals. The bank is forecasting renewed gains to 1.22 at the end of this year with a further advance to 1.26 at the end of next year.
According to Nordea, the jump in energy prices has been an important factor with net dollar support. The bank also considers that a covering of short positions has been a key element underpinning the dollar.
From a medium-term perspective, Nordea maintains a negative view on the US currency. The bank focuses on the US fundamental outlook with notable concerns over the US fiscal profile with unsustainable budget deficits and debt levels.
It also notes that the current account deficit has widened, reinforcing the US ‘twin deficit’ vulnerability.
Nordea also notes that the dollar is still very strong in historic terms, increasing the scope for further net selling.
