Dollar vs. Euro Fluctuations: What Should Future Investors Know?
A strong US dollar
With most countries adopting floating exchange rates, currency fluctuations are a norm. Historically, the euro has been slightly stronger than the dollar, even though the dollar is the benchmark currency and is one-half of the most traded base currency in the forex market.
2022 was a significant year for the greenback, as it gained against almost all major currencies at unprecedented levels. The primary reason for this was the aggressive spate of interest rate hikes by the Federal Reserve as they sought to keep inflation in check. In fact, the dollar strengthened to the extent that, at a point, it achieved parity with the typically stronger euro.
This was the first time since 2002 that the US dollar had attained such a level of relative strength. Although experts have focused their attention on the dollar-euro relationship, it should be noted that the dollar also strengthened against other currencies like the British pound and the Japanese yen.
However, the final two months of 2022 saw another spell of exchange rate fluctuations as the dollar lost some ground against the euro. For American consumers, this means more expensive purchases whenever they’re abroad. However, these fluctuations are more significant for investors, as they must analyze the role of currency trends as they set up their investment portfolios.
What does the euro-dollar fluctuation mean for investors?
Any form of volatility in the forex market has significant implications for investors. For instance, Microsoft, one of the most valuable companies in the world, informed its investors and analysts that its future revenue would experience a drop because of the strengthening dollar. Ironic, isn’t it?
The reasons aren’t far-fetched. Like other major global corporations such as Google and Amazon, Microsoft is a multinational company that makes a significant chunk of its revenue in foreign currencies. As such, even significant sales abroad will mean fewer profits in US dollars. This will ultimately result in reduced investment returns for shareholders and investors.
Additionally, fluctuations in the dollar-euro exchange rate may affect the attractiveness of US financial assets to foreign investors. For instance, foreign investors will opt for more favorable options as US financial assets become more expensive to purchase with local currency abroad due to the dollar’s strengthening value. The result is the weakening of new flows into US bonds.
What can investors expect in the future?
Rob Haworth, a senior investment strategy director at US Bank wealth management, offers insight into what currency volatility means for investors. He emphasizes that although currencies aren’t as volatile as some other stocks, there are significant considerations for U.S-based investors with money invested in markets abroad.
He advises that investors should not base their decisions on currency trends. Here’s what investors can expect in the future regarding dollar-euro fluctuations:
Although the euro weakened against the dollar for much of 2022, reduced gas prices and significant growth momentum in the European Economic Area (EEA) are expected to mean positivity for the euro’s fortunes in 2023.
J.P Morgan research speculates that the euro/dollar pair will reach 1.10 by March 2023 before plunging to 1.08 in September 2023. Experts at Capital Economics also have a similar speculation, with the EUR/USD rate to hit 1.10 in 2023.
Experts at ING Group forecast that the Federal Reserve will soon put a stop to its tightening cycle regarding interest rates, while European prospects look promising with reduced energy prices. As such, the expectation is that the EUR/USD will trade over 1.10. Additionally, JP Morgan Research expects that investor trading themes for 2023 will lean away from the US and, by extension, the dollar.
How have currency fluctuations affected the cryptocurrency market?
Fluctuations in the forex market have also affected the cryptocurrency market. It is interesting to note that both of them were on extended bear runs in 2022. However, a possible explanation for this is that investors bought cryptocurrency to hedge against inflation. It remains to be seen whether a similarly strong bull run will mutually reflect in their market fortunes in the future.
Several factors affect the currency exchange rate, including inflation outlook, capital flow, and interest rate differentials. However, the primary determining factor of a currency’s exchange rate is the strength of its economy. Thus, Forex investors should be wary of following market trends. Rather, they should look out for other economic indicators while making modifications to their portfolios and investment decisions.
This blog is for educational purposes only. The information we offer does not constitute investment advice. Please always do your own research before investing.
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