Even though it’s unlikely to be a straight line from here, we expect the US dollar to weaken further over the medium term and gold prices to stay well supported.
WHAT YOU NEED TO KNOW
Nominal interest rates and bond yields will likely stay close to their current ultra-low levels for a protracted period of time across the developed world. But we believe their real levels could potentially be set to fall further in the US relative to the euro area, putting further downward pressure on the US dollar.
With supply potentially exceeding demand and a range of country differentials – rates, growth, trade and fiscal deficits – all weighing on a still overvalued US dollar, we have recently revised our forecast and now expect the US dollar to fall to 1.25 against the euro over the next 12 to 15 months, which would be close to fair value estimates. Notably, the EU recovery fund should support the euro.
The fall in the real yields of US government bonds, partly as inflation expectations have risen, has further lowered the opportunity cost of holding other safe-haven assets such as gold. We have recently changed our forecast and believe gold prices will drift gradually higher to USD 2,250 per ounce by the end of 2021.
As economic uncertainty should eventually fade, demand for safe-haven assets including gold is likely to lose momentum. But this is only likely to be a mitigating factor, as low real yields are likely to remain supportive. However, we also note that gold prices have recently been driven less by fundamentals and more by exchange-traded fund (ETF) flows, which are a key swing factor.
US DOLLAR: WEAKENING FURTHER
We see no near-term catalyst for further US dollar weakness and believe that verbal intervention by the European Central Bank (ECB) should mitigate any further euro appreciation for some time. Our new year-end target for the US dollar against the euro – at 1.20 – is similar to current exchange rate levels. Yet we expect the US dollar to depreciate further in 2021 and 2022. As the EU recovery fund brings an extra layer of fiscal integration, the US dollar may end 2021 at 1.25 versus the euro, which would be at the low end of the range of fair value estimates. We believe the US dollar could fall to 1.28 against the euro in 2022.
Forward contracts point to a flat path for the euro/dollar exchange rate over the next year or so. Yet our analysis suggests the US dollar is overvalued by around 8% versus the euro, and we use this information to determine the direction of our long-term forecasts.
All forecasts are not a reliable indicator of the future position.
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Group Head of ESG, Sustainable and Impact Investing
Group Chief Investment Officer
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