Euro has scope to top $1.10 by end next year

Bloomberg

The euro has scope to bounce back above $1.10 by the end of next year, taking it to levels last seen in the early months of the Russia-Ukraine war, before energy and economic concerns helped drag the common currency below parity with the greenback for the first time in decades.
Deutsche Bank AG’s Alan Ruskin and George Saravelos reckon that the euro could rise to that level, even without a major change in the geopolitical environment, if — as the bank suspects — the US monetary authority errs on the side of easing monetary policy in the second half of next year and the European Central Bank is still increasing borrowing costs. It’s currently trading around $1.0380, more than 8% above its nadir from late September.
“If this is achieved, even without a shift in geopolitics, this policy divergence is regarded as a sufficient condition to secure a EUR/USD recovery to at least 1.10 by late 2023,” they wrote in a note to clients.
On top of that, Deutsche Bank says that it would bolster its end-2023 forecasts for the euro by at least 5 US cents if there were a drastic improvement in the Ukraine-Russia situation.
The flip side of their euro view is that — in the absence of a major risk event like the market saw earlier this year with the onset of the Ukraine war — they doubt the US dollar will climb to fresh highs if the Fed’s overnight benchmark tops out around 5%, which is close to what the market is currently pricing in and the more likely scenario according to Deutsche Bank.
The US currency could potentially lurch to new highs if sticky inflation prompts the Fed to take its target to 6% or above, but that is not the most likely outcome in Deutsche Bank’s view. The Bloomberg Dollar Spot Index, which measures the greenback against a basket of developed and emerging-market peers, is currently around 6% below its late September high.

Meanwhile, there is a possibility of a marked bounceback in the yen if the Bank of Japan shifts its policies, according to Ruskin and Saravelos. Held down by the BOJ’s decision to maintain ultra easy monetary policies, the yen this year weakened to levels unseen in decades, prompting authorities to step into markets and prop it up directly for the first time since 1998.

According to Deutsche Bank, a trend toward higher inflation means that authorities could in fact choose to adjust its so-called yield curve control policies and that if they were to do so that could spur the yen higher, pulling the widely watched dollar-yen pair down by 5% to 10% in fairly short order. And that in turn, could negatively impact a number of currencies that have been performing strongly this year because of so-called carry trades, which are often funded from lower yielding peers like the yen.