The dollar finally looked more attractive as U.S. stocks gained more ground relative to European shares, with the greenback finally trading higher on Friday, but remained down 0.17 for the week amid heightened expectations of a narrower rate hike from the Federal Reserve next week %.
The euro’s gains this week have been underpinned by declining expectations for Fed rate hikes amid widespread expectations that the European Central Bank and the Bank of England will still need to raise rates further to curb inflation.
The market consensus for a rate hike had dropped from 75 basis points to 50 basis points at the Fed meeting in December, and is now firmer at 25 basis points. That expectation was not changed by Thursday’s fourth-quarter GDP growth figures, which showed consumers actually spending more slowly than expected, and Friday’s personal consumption expenditures (PCE) data, which also showed a surprise drop.
ING analysts said: “While inflation remains above target and unemployment is low in the cycle, there are signs that the economy is responding to tighter monetary policy and the Fed will recognize the public’s fear of raising rates too quickly and tipping the economy into recession. Worry.”
In late New York trading on Friday (27th), the ICE U.S. Dollar Index (DXY), which tracks the U.S. dollar against six major currencies, rose 0.1% to 101.72. The euro fell 0.2 percent to $1.0869.
“We think long USD positions are starting to look attractive again, even from a strategic point of view,” Danske Bank said, according to Forexlive.
The bank pointed out that the euro/dollar has lost momentum and European stocks have begun to underperform US stocks, which is a source of hope for the dollar.
So far in January, MSCI’s broad index of European shares outside the UK is up about 9%, compared with 6% in the US.
However, Amundi said much of the outperformance was based on a “Goldilocks scenario,” in which the euro zone will continue to drive economic growth regardless, supporting earnings while central banks pause interest rate hikes.
But European shares have yet to price in the need for the ECB to raise interest rates (as inflation remains high), putting corporate earnings on a less rosy backdrop.
Vincent Mortier, chief investment officer at Amundi, believes that European stock indexes will consolidate 15% to 20% from current levels. Although the rally may still last for months or weeks, “there will be a normalized decline.”
The recent rise in U.S. stocks compared to European stocks has convinced the market that European stocks are not rising in one direction. Indications over the past week were that European stocks rose about 1 percent, underperforming Wall Street, with the S&P 500 up 2.4 percent.
But many see the underperformance in Europe as an anomaly, given the rapid flow of foreign capital into the region. Investors poured $3.4 billion into European equity funds in the week to Wednesday, the strongest inflow to European equities since February 2022, according to a Bank of America report.
Others see European stocks as not the catalyst to reverse the dollar’s slide, unless the U.S. Federal Reserve surprises markets with hawks next week, which is unlikely.
“Barring a 50 basis point rate hike or a conditional commitment to stop tightening, the bar to change is high and the dollar, while tight and oversold, lacks a catalyst for a reversal,” TD Securities said.
As of Saturday (28th) around 7:00 Taiwan time Price:
The dollar index was at 101.94. +0.1% The euro traded at $1.0867 against the euro. -0.23% GBP/USD was trading at $1.2397. -0.08% The Australian dollar traded at 0.7103 US dollars to the US dollar (AUD/USD). -0.16% The U.S. dollar was trading at 0.7511 Canadian dollars to the U.S. dollar. +0.12% The U.S. dollar was trading at 129.85 yen to the U.S. dollar. -0.28%