Euro dollar rate to 1,2020 in 2020?

At the beginning of 2018, the euro-dollar exchange rate reached 1,25, after which it began to decline to around 1,10. Is this price expected to drop further to the bottom of the mentioned bandwidth? Or is a return to 1,25 to be expected in the coming years? Nothing is more difficult to estimate than the movements of exchange rates. But, that doesn't mean we can't try to say something about it. To start with the main reasons why the US dollar has strengthened approximately 2018% since the beginning of 12:

• Economic growth in the United States was considerably higher than in the European Union. This is partly due to the significant budgetary boost.
• The escalating trade war between the United States and China also made the dollar more attractive. In times like these, investors take shelter in safe havens; the dollar has traditionally been such a refuge.
• The US central bank (Fed) was raising interest rates and at the end of last year the only unknown in that area was whether the bank would raise interest rates 3 or 4 times during the year.
• In the eurozone, tensions between Italy and the European Commission rose so high that the question of whether the euro is viable in the long term resurfaced.

Higher economic growth
Economic growth in the United States is still higher than in the eurozone, but no new fiscal stimulus is expected. American President Donald Trump said he wants to lower taxes, but the chance that he will succeed is nil. For this he needs the approval of the House of Representatives. When he cut taxes significantly last time, his Republicans had the majority in this house. It is now the Democrats who call the shots. They will shoot down a tax cut proposal. This is in the knowledge that news of the cuts will further increase the budget deficit and increase Trump's chances of winning in the elections in November next year. As soon as Trump's plan to cut taxes is adopted, he would take full credit for it on Twitter.

That said, there is a risk that if Democrats shoot down a plan to cut taxes, they could be punished for it next November. It would therefore not surprise me if there is some support for the economy from 'the budget angle' in 2020, although the Democrats and Republicans will argue about it for a long time before that happens. This wrangling is more unfavorable than beneficial for growth and therefore the ultimate boost is relatively small.

No, if a significant fiscal stimulus can be expected anywhere, it is in the eurozone: specifically in Germany. Stimulating next year means that the effect will be felt by 'ordinary Germans' in the year 2021. That is the year in which Germans will go to the polls. The current government coalition consisting of CDU/CSU and the SPD scored dramatically poorly in the regional elections, something that does not bode well for 2021. Unless Berlin spreads sweet things.

Less uncertainty
Next year could also bring more peace and less uncertainty on the trade front. When the United States and China sign the partial trade agreement, a relatively quiet period can be expected. I expect more tensions later, when the two countries will have discussions about real sticking points. And don't forget: ultimately the conflict is not about trade, but about the most dominant position in the world. In other words: the trade war will continue for a long time, but the first half of 2 could be a 'ceasefire period'. This conflict between the two countries is also to be expected if the Democrats conquer the White House in 2020. The Democrats are 'if anything' even more fierce towards China. 

Changes in expectations about monetary policy in the United States and the eurozone are generally an important factor for the euro-dollar exchange rate. It appears that the European Central Bank will not increase interest rates in the coming years. The chance that the bank will even think about it between now and 2022 is zero. The Fed, on the other hand, is cutting interest rates. My expectation is that the bank will continue with this in 2020. The interest rate difference between the United States and the eurozone is therefore becoming smaller. 

In the euro zone, it appears that new tensions between Brussels and one or more euro countries (such as with Italy) are not to be expected. In fact, new steps can be taken in the pursuit of perfecting the monetary union. As a result, the viability of the euro in the longer term can be assessed more favorably.

Structural change?
Then there is another structural change that we have to take into account. In recent decades, political Washington has been, at least verbally, in favor of a strong dollar. However, the president has broken with this tradition. Washington is now open and honest about it: a weaker dollar is in American interests. That could be a game changer, not only in terms of the exchange rate of the dollar but also in terms of the role of the dollar in the world. It seems that Washington wants to back up its words with actions.

There are voices among the American government that they view declines in the value of coins as an unauthorized subsidy. That seems like a linguistic issue, but the consequences can be significant. If these declines in value are indeed considered unauthorized subsidies, the American government will probably take countermeasures against these countries. This criticism is by no means limited to countries such as China. For example, Trump recently lashed out at the European Central Bank on Twitter when it decided to further lower interest rates and restart quantitative easing. To him, that was tantamount to currency manipulation.  

If economic growth in the United States slows in 2020 and a recession becomes a real threat, don't be surprised to see more attempts from Washington to weaken the dollar. A weaker dollar provides some counterbalance to a slowdown in growth. One area where we can see this strongly is the relationship between the White House and the Fed. I won't be surprised if pressure on the Fed increases further next year. And if Trump is re-elected, I think that will mean the end of Powell's term as chairman. 

It is reported that Washington politicians also regularly propose to intervene directly in the market to push down the dollar. Economists know well that these interventions do not work or at best only achieve temporary results, but it would certainly not be the first time that the US government has done something that is demonstrably bad economic policy. In line with this, there is also talk in Washington about taxing capital inflows from abroad, in order to discourage the demand for dollars. Some deputies have even prepared a bill in that direction.  

Euro-dollar rate
Looking at all of the above, it will not be surprising if the euro-dollar exchange rate now climbs towards 1,20/1,25 on balance in the coming year. As the rate rises, (verbal) countermeasures from the European Central Bank must be taken into account: just like the United States, the euro zone is not looking for a stronger own currency. Seen from this perspective, we are already in fact dealing with a global currency war.

If the dollar weakens and other countries, as in previous years, take countermeasures because they see an increase in the value of the currency against the dollar as undesirable, this could lead to new tension in the world.