The bears are mounting against the euro and EUR/USD is indeed falling. But the moves are relatively slow.The dollar’s appreciating trend has intensified as the anticipated policy dynamics of an expansionary fiscal stance and higher interest rates under a Trump presidency have proved to be a powerful dynamic for the currency. DXY is now at its strongest level since Q1 2003 and market expectations are growing that the dollar may rise materially further over the medium term as fiscal expansion is overlaid on an economy operating at or very close to full employment. The sharp rise in bond yields has also assisted dollar strength.
That said, we are cautious about getting caught up in the whirlwind and revising up our dollar forecasts higher just now based on anticipated US economic policy.
We anticipated a move into a 1.00-1.05 range for EUR/USD next year, as whoever was elected president would pursue a more expansionary agenda. That view still remains the case and there are a number of reasons why we are hesitant to revise up our forecasts.
Based on the DXY, the dollar is at its highest level since 2003. But it is interesting that in 2003 the dollar was in a pronounced depreciation phase amid (then) President Bush’s policy agenda of steel tariffs (2002) and tax cuts, whilst inflation was also rising. Currently, US inflation is rising and the US President-elect's indicated policy priorities of renegotiating trade arrangements, threatening higher tariffs, and cutting taxes is having exactly the opposite effect on the USD. At present, various PPP estimates, ranging from producer prices to the Big Mac index, imply the euro is around 20% undervalued versus USD.