When Is Euro Going to Reach Parity with Dollar?

Some experts predict that in the second half of the year, the common European currency is going to start losing its value against the U.S. Dollar and is eventually going to reach parity with the American currency. Market Leader tried to find out more details of why this may happen…

To be more specific, the experts say that in late 2015 and early 2016 the international community expected more weakness of the Euro against the U.S. Dollar. Goldman Sachs came out with an even more gloomy forecast for the common currency by predicting a drop below parity all the way down to $0.95 per 1 Euro.

Those predictions got pretty simple explanations. The thing is that previously ECB President Mario Draghi announced the likelihood of a new round of quantitative easing since the Eurozone economy needed more stimuli and the ECB had to expand the amount of purchased bonds within the scope of its asset purchase program. They turned out to be right since this is what happened during the latest ECB meeting on March 10^th. The European Central Bank decided to expand the asset purchase program. If to consider this as the beginning of a new round of QE by the ECB, we are definitely going to see the common European currency going down to a certain extent.

Still, the reality is, the EURUSD exchange rate still cannot consolidate below 1.1, which means it is still a low way down to the expected parity between the common European currency and its American counterpart. At the same time, it is not only about the ECB. Across the pond, the Federal Reserve started raising the interest rates and everyone expected a series of interest rate hikes in early 2016. Even though the first hike took place in December 2015, the rates have never been raised since then despite the expectations, which are still high. However, Fed Chairman Janet Yellen gave everyone out there to understand that there is not going to be any rapid hikes one after another over a relatively short period of time. Simply put, it is still worth expecting more interest rate hikes in the future but these are probably going to take some time to be manifested.

With that being said, the international community started spreading the idea that the U.S Dollar is overpriced and growing at a too fast pace. By the way, Mrs. Yellen told this herself when discussing the Fed’s monetary policy prospects during one of the latest Fed meetings. This made the U.S. Dollar drop 5% against a basket of other major currencies as the expectations of EURUSD parity failed once again.

Still, some experts believe that the existing trend is a temporary one as the U.S. Dollar seems to have taken a timeout and the overall bias still belongs to the bears. If to look at the pace of growth shown by the American and European economies as well as the ECB and Fed’s balances, we can see that the American economy is the stronger one to date, which means that the likelihood of the U.S. Dollar starting a new rally against the Euro is still high. A lot of major banks are still betting on the EURUSD parity. The question is WHEN.

The bottom line is, the USD rally may be stopped by any figures confirming an economic slowdown in the USA. The thing is, the USA is currently at the end of the current major economic cycle, which usually lasts for 5 to 10 years. The U.S. economy has been growing over the last 7 years starting from 2009. That’s why it is logical to expect a slowdown in the coming years. If that’s the case, investors are definitely going to start reducing their exposure to dollar assets in favor of other assets. In this case, the U.S. Dollar strength will be compromised at best. Still, the rest of the economic world has nothing cheerful to offer investors. Other economies worldwide are even weaker than the U.S. one. Basically, that’s why everyone is switching to the Dollar.