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Invest in the booming US? Strong euro says ‘stay home’

dollars vs euros
Invest in the US? Weak dollar may mean it's better to stay in Europe

“I’ve never seen an economy that feels as good as the US today,” Mark Zandi, chief economist at Moody’s Analytics, told CNN Business. “The economy is booming. It’s busting out all over.”

The US economy is seeing a massive surge. But should you invest in it? With the dollar still expected to decline sharply against the euro, it’s important to weigh all the possibilities.

For now, the basic news is shock-and-awe positive.

“A revival in the US economy is driving up demand for everything from plane tickets to dinner reservations. Many companies that stand to benefit can’t even keep up,” writes the Wall Street Journal.

“Diners are streaming into restaurants but owners can’t find enough people to cook or serve their food. People are shopping for cars in record numbers but dealers can’t fill their lots.”

Recent job creation figures have been the one disappointment with only about 240,000 new jobs registered in April. But analysts say that employers simple haven’t been able to hire fast enough, which is why, for example, restaurants are in desperate search for waiters, and McDonald’s just raised its wage to $15 per hour to attract workers.

The basic numbers are striking. Despite a contraction in the last quarter of 2020, the US economy jumped back into fast recovery in just the first three months of 2021 with a 6.4 per cent growth rate in the first quarter – the fastest pace for growth since the third quarter of 2003, according to forexlive analysts.

It is obviously tempting to invest in the US boom, and there are many possibilities from stocks to alternatives to NFTs – the latter are the fastest-growing market today. A work sold in March by digital artist Mike Winkelmann (aka Beeple) at auction for $69.3 million.

What about dollars versus euros?

Choosing dollar investment over the euro area presents an obvious challenge: The profit you earn in dollars will be worth less in Europe, as the euro rises against the dollar.

There is a strong consensus among analysts that this is what to expect, as there is a clear trend going back to last year.

The EUR/USD pair has risen steadily all week to reach 1.22 at this writing.

“The EUR/USD trend was higher in the second half of 2020, rising from around $1.08 in mid-May to $1.23 in December as the US currency weakened against a basket of currencies on low interest rates, stimulus from the Federal Reserve and the US government, and as investors took a risk-on approach to rallying stock markets,” writes Nicole Willing, an analyst at capital.com.

Although the dollar turned higher at the end of December on an increase in US Treasury yields, and rose during the first quarter of 2021, pushing the EUR/USD rate down to $1.17 on March 30, the euro came right back in April

“As the rise in Treasuries has halted, the dollar has slipped back in relation to the euro in April, with the rate moving back to the $1.19-$1.20 range even as Europe got off to a slow start in rolling out vaccinations and is experiencing a third wave of Covid-19 infections,” Wittig continues.

The reaction to issues in the European vaccine rollout is noteworthy. Traders have been, in general, impressed with the European recovery effort, appreciating the massive injection of funds into the economy just as stock markets have reacted to the huge stimulus programme that US President Joe Biden is pushing through.

The result is that traders are betting to move the euro higher against the dollar, even when the news from Europe is bad.

“Analysts at Dutch bank ING said in their euro to dollar forecast: April has so far been a good month for EUR/USD – despite Europe still struggling with third Covid waves. It seems investors are being very forward-looking and using the recent inflection higher in European vaccination rates to draw confidence in a European recovery later in the quarter… And with little downside seen for European rates, one could argue that the EUR downside is limited too.” 

Analysts at BNP Paribas Wealth Management, in a note called “Taper-less Tantrum” write that they expect the Federal Reserve to announce the reduction in asset purchases during the fourth quarter of 2021 starting from the second quarter of 2022 and a first increase in interest rates during the third quarter of 2023.

They explained in the note: “At the same time, the ECB has been more active verbally at trying to talk down the rise in eurozone yields. Yield spreads moved in favour of the USD. Nevertheless, short-term yield spreads should remain low for a long time and that should be a key negative factor for the dollar.” 

The analysts added: “The euro should recover gradually as vaccines allow the European economies to emerge from the most recent string of lockdown measures. Therefore, we keep our EUR/USD target to 1.20 and 1.25 for the next three and 12 months, respectively. This suggests upside for the euro.”

Technical analysts, who look only at price movements, see the EUR/USD’s rise from 1.1703 resumes today by breaking to 1.22. The pair is expected to move past 1.2348, and to continue the uptrend from there. There is a bullish consensus for EUR/USD in the medium term from technical analysts that supports the fundamental analysis we’ve noted.

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