We are currently in a big U.S. dollar currency cycle, with the greenback strengthening against a foreign currencies after years of falling behind. Consequently, ETF investors who are seeking diversified exposure should consider currency risks when investing in overseas markets.
On the recent webcast, Benchmarks Matter When Hedging Currency, Sebastien Galy, Director of Foreign-Exchange Strategy at Deutsche Bank, anticipates continued weakness in the euro currency against the USD in the months ahead.
Galy anticipates the European Central bank will expand its quantitative easing program to combat ongoing deflationary pressures, which will weigh on the EUR currency. In the Eurozone, the weaker commodity prices and slight strength in the euro has caused downward revisions to inflation forecasts, with risks to growth and prices on the downside.
“Within a risk management approach, we expect the ECB to react with a six month extension of QE in December,” Galy said.
Additionally, Galy argues that Federal Reserve, notably an expected interest rate hike in the U.S., will play a major role in the currency moves between the EUR and USD. Looking ahead, the strategist expects improved U.S. data in the fourth quarter and a slow monetary policy tightening.
“EUR/USD below parity into next year as the Fed slowly and belatedly tightens,” Galy said.
The EUR was trading at $1.1383 Tuesday, and Galy projects it could fall to $1.05 by the end of the year.
In the current big USD cycle, the currency strategist also calculates that we are currently just beyond the half way point and the Trade Weighted USD Index could still appreciate another 10% through 2017.