Euro / Dollar: Wells Fargo Forecast Dollar Strength in 2022 and 2023

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The Dollar's run of strength that saw it dominate global FX markets in 2021 is not set to end soon, according to one of the largest lenders in the United States.

Wells Fargo say they anticiapte further Dollar strength in 2022 and in 2023, suggesting a long cyclical upturn for the currency is underway.

Forecasts for the year ahead show the Dollar's rally will push the Euro to Dollar exchange rate (EUR/USD) below 1.10.

"With the Fed having started the tapering of its bond purchases and expected to raise interest rates beginning in the second half of next year, given our revised outlook for Federal Reserve monetary policy, our outlook for the U.S. dollar has also evolved," says Nick Bennenbroek, International Economist at Wells Fargo.

"We now expect an extended period of U.S. dollar strength and see broad-based greenback strength through late 2023, compared to our previous forecast that U.S. dollar strength would only last into the early part of 2022," he says.

• EUR/USD reference rates at publication:
  Spot: 1.1318
• High street bank rates (indicative band): 1.0920-1.1000
• Payment specialist rates (indicative band): 1.1216-1.1260
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The Dollar has strengthened against the Euro through the duration of the year, with the strength accelerating in the second half of the year as investors grew increasingly confident that the Federal Reserve was moving towards raising interest rates.

"As the Fed and foreign central banks become more active over the next several quarters, we believe monetary policy differences will become increasingly important for currency performance during that period," says Bennenbroek.

"In fact, one prime example of how monetary policy divergence could be very consequential for currency performance is the ECB and the euro," he adds.

Wells Fargo finds that although the European Central Bank (ECB) has paid attention to quickening inflation trends across the region, it has so far expressed less concern about inflation pressures than most other major central banks.

ECB President Christine Lagarde recently said that the central bank expects Eurozone inflation to eventually recede and that if "we were to have any kind of tightening approach to the current situation, it would actually do more harm than good."

"That is consistent with our view that the ECB will taper its overall bond purchases only very gradually during 2022, and why we also expect the ECB to keep its Deposit Rate steady at -0.50% through 2022 and 2023 as well," says Bennenbroek.

It is this divergence between the outlook for ECB policy and a faster acting Federal Reserve that underpins Wells Fargo's revised forecast for the EUR/USD exchange rate to fall toward the lower end of a $1.05-$1.10 range.