Will 2018 be the year of the euro?

The solid economic growth in Europe and the prospect of a widening trade deficit in the United States (US) give the euro wings in the first days of 2018. An important lesson from last year is that there are no guarantees that this increase will continue.

The rise of the euro against the dollar was the big surprise on the currency markets last year. It is not surprising, however, that this advance will continue in 2018. This is partly due to the strength of the European economy. PwC, a consultancy firm, forecast in mid-December that the eurozone will be heading for growth of just over 2% this year. With an expected growth of 2,5%, the Dutch economy is even the European leader. You would almost forget that 5 years ago the eurozone was still struggling with a serious recession.

Good news for savers
The economic recovery has received a significant boost from the policy of the European Central Bank (ECB). With the rise of the euro, traders are anticipating a turnaround in this policy. ECB President Mario Draghi has already hinted that the ECB's buying program is likely to end in the autumn. The road to an interest rate hike is then wide open. Savers will be very happy with that.

In addition to the well-performing European economy, the US tax cut also plays a role in the decline of the dollar. Just before Christmas, President Donald Trump finally managed to get the measures through Congress. Consumers and businesses in the US will pay a lot less tax in the current year. In the short term, this will give the US economy a boost, but that will not be a reason for the Federal Reserve to raise interest rates faster.

Investors better protected
Americans will use some of the money left over from the tax change to purchase smartphones, tablets and other items. A large part of these products comes from abroad. As a result, the US trade deficit will widen further, so that the dollar will remain under pressure.

Finally, the introduction of the new European investment regulation Mifid 2 on 3 January plays a minor role in the rise of the euro. Investor protection is now even better organized, making it more attractive for parties to hold their assets in European assets. This increases the demand for euros.

Important lesson
So in many ways the euro has the wind at its back. ING currency strategists predict the currency could reach $1,25 before the ECB becomes seriously concerned about the competitiveness of European businesses. An important lesson from 1 year ago, however, is that even if all signals point in the same direction, this is no guarantee that the exchange rate will actually go in that direction. 

Lawrence Martins

Laurens Maartens is a currency expert at the Dutch Payment and Exchange Company (NBWM). Maartens analyzes current currency developments and also provides lectures and training in the field of currency management.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.