The US dollar rallies across the FX dashboard as the Federal Reserve embarks on a new tightening cycle. The US central bank has already raised the funds rate twice.
In May, it did so by hiking 50bp. But it plans to do more – much more, according to the Fed’s forward guidance.
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As a result, the EUR/USD exchange rate dropped sharply. The European Central Bank (ECB) may raise the interest rates too, but even so, the gap between the two central banks remains widespread, as the ECB currently has the deposit facility rate well below zero.
To many, the US dollar has reached extreme levels. However, just judging by the interest rate differential with other central banks and considering the role of the US dollar in the international financial system, the rally may have just started.
A stronger dollar may hurt US exports. But at a time of ravaging inflation and war in Eastern Europe, traders and investors may just look for safe haven in the world’s reserve currency.
After all, not even the classic safe-haven currencies, such as the Japanese yen or the Swiss franc, gained against the greenback. Hence, the world is turning to the US dollar, and what we’ve seen so far may be just the beginning of a much stronger move.
Will we see the EUR/USD to parity? According to Amundi, Europe’s largest asset manager, we will.
Amundi bets that the euro Will fall to parity with the US dollar
The largest asset manager in Europe is betting that the common currency will fall to parity with the US dollar. This week, an article published by the Financial Times revealed that Amundi’s chief investment officer believes that the ECB will fall behind the Fed in fighting inflation and that the euro will reach parity with the US dollar in the next six months.
Truth be said, the euro is sinking against the US dollar for quite some time. It topped ahead of the Great Financial Crisis in 2008 and it did not look back ever since.
The chart above shows a clear downtrend, marked by a series of lower highs and lower lows. Given the divergence between the two central banks, the common currency will have a hard time bouncing even if the ECB hikes the rates during the summer.
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