Horizon Q3│2024 - Currencies
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Divergence in interest rates and growth influences exchange rates
A number of factors have recently provided a tailwind for the US dollar against the euro, pushing the exchange rate down to USD 1.06 per euro in the short term. These include rising geopolitical risks, which have created additional safe-haven demand for the dollar, and the continued very robust performance of the US economy. On the other hand, the euro has recently been weighed down by uncertainty following the European elections, in particular the snap elections in France.
Euro-dollar exchange rate recently sideways
Euro exchange rates
By contrast, the eurozone economy is only slowly regaining momentum after the inflation and interest rate shock of the past few years, and the ECB's turnaround on interest rates to stimulate the economy is further weakening the common currency. At present, the US Federal Reserve is unlikely to follow its European counterpart and begin the cycle of interest rate cuts until the end of the year. Until then, each rate cut by the ECB increases the interest rate differential with the Fed, and the larger the differential, the more capital tends to flow into the US.
ECB moves ahead with interest rate pivot
Grey area: Forecasts. Upper end of the Fed funds target rate (in %)
However, much of this has already been priced into the markets, so we expect only limited appreciation of the greenback as the year progresses. On the other hand, the euro could be supported by the fact that the eurozone economy is likely to recover somewhat as the year progresses, while the US economy is expected to slow down slightly. The exchange rate effect of a widening of the interest rate differential is therefore expected to be roughly offset by a simultaneous narrowing of the growth differential. All in all, we expect the EUR/USD exchange rate to move sideways in the coming months.
The Swiss National Bank completed its monetary policy turnaround three months before the ECB. This initially weakened the Swiss franc somewhat, pushing the exchange rate close to parity. However, once it became clear that the ECB would soon follow suit, the exchange rate moved back towards CHF 0.95 per euro.
In the coming months, we expect interest rates and the economy in the euro area and Switzerland to move at roughly the same pace. We therefore expect the exchange rate to move sideways around CHF 0.98 per euro.
Exchange rate forecasts: Euro with moderate upside potential
Berenberg and consensus forecast in comparison, values at the end of 2024 and mid-2025
Author
Dr. Felix Schmidt
Senior Economist
