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The euro: a one-eyed king in the land of the blind

  • The euro remains strong after benefiting from the weakness of the dollar and the pound, which are waging their own political problems in their respective countries.
  • The political uncertainty in the United States before the closure of its Administration is taking its toll on the dollar.
  • Monex Europe, Ostrum AM and UBS analyze the euro / dollar ratio of these last weeks and for 2019.

On Thursday of last week, the euro reached its maximum in the last eleven weeks, after benefiting from the weakness of the dollar to the change of expectations about the increases in interest rates in the United States. A sweet milestone that lost strength the same day after the announcement of the contraction of the French industrial production, which threw the euro to the minimum among the G10 currencies.

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As explained by Menox Europe, the strength that the euro is showing is timely. As exemplified by the saying, it is "in the land of the blind, the euro is the king". Bart Hordijk, analyst at Monex Europe , explains it this way: "Analysts follow the news, but the euro apparently does not do so since the single currency rebounded to a maximum of 11 weeks last Wednesday, despite the terrible data of the German industrial production earlier this week and the Brexit process that continues to go nowhere. In the land of the blind, the euro can become the king of the Cyclopes because, after all, despite its obvious shortcomings, the problems that weigh on other major currencies such as the pound and the dollar are, at this moment, worse than the ones the euro supports. "

Analysts say that normally, in times of volatility or uncertainty, the dollar becomes a refuge asset, but a situation that crosses the United States - with the controversy surrounding the construction of the Wall on the Mexican border and the closure of the Administration. American- have weighed on currencies and investors. "With the possible pause in the rate hike and the worsening economic signals from the United States, the dollar may have temporarily lost its status. Especially with the closure of the government. Without a quick resolution in sight, it can be said that the damage to the dollar will be exponential, "adds Hordijk.

On the other side of this situation, what can be helping the euro? For Hordijk, the labor market can be one of the keys. "It may be that with wage growth at the highest level in a decade, with 2.5% in the third quarter and a lower unemployment rate, the good health of the labor market has supported the euro. In addition, the truce that seems to have given the problems with Italy, "he says.

In any case, the euro is not safe from political instability. "Social and political disagreements amplify the global recession. Italy possibly enters a recession and the situation has worsened in France. Germany is no exception as the freedom of fiscal movement remains unimplemented, "says Axel Botte, strategist at Ostrum Asset Management, a subsidiary of Natixis IM . All this, sooner or later, will bill the euro.

The forecasts for 2019 of managers and financial institutions, are raised more if the dollar rally has ended than looking for arguments to support the possibility that the euro remains above the North American currency. For example, UBS points out that the dollar is still overvalued thanks to the notable positive spreads of short-term interest rates, given that the Federal Reserve has been raising interest rates. In the opinion of the Swiss bank, this situation, added to the controversy over the Italian budget, possibly generates more short-term gains for the dollar against the euro.

"We forecast a euro / dollar ratio of between 1.15 and 1.20 for the next six months. In our opinion, a key risk is the launching of a large infrastructure program capable of boosting growth and inflation. The dollar could also remain strong against the euro if the frictions between the US. and China intensify in 2019, the euro zone data slow down, or Mario Draghi's successor in the ECB has a moderate monetary stance, "reflects UBS in its outlook report for 2019.

SUBMITTED BY Funds Society