Deutsche Bank Forecasts Robust Dollar, Challenges Ahead for Euro-Dollar Exchange Rate

Image © Deutsche Bank

The US dollar continues to show robust strength supported by its high yield and geopolitical considerations, while the euro faces headwinds that are likely to keep the EUR/USD exchange rate within a narrow range, according to Deutsche Bank's George Saravelos.

As summer approaches, the outlook for the dollar remains bullish, while the euro is expected to struggle to break above 1.10 against the dollar, with a higher likelihood of dipping below 1.05.

“We started the year bullish on both the dollar and FX carry. We're sticking with both views as we approach the summer months,” Saravelos notes. Despite a hawkish Fed repricing and US growth outperformance, the dollar continues to benefit from a low volatility environment in the FX market. This stability is largely due to the remarkable symmetry in monetary policy expectations across developed markets, with many central banks, including the Fed and ECB, projected to follow similar easing cycles through 2025-26.

However, Saravelos sees potential for greater divergence favouring the Fed. “We see risks towards far greater divergence favouring the Fed,” he says. This, combined with the dollar’s status as a high-yielding currency, provides a strong foundation for continued USD strength. Additionally, the approaching US election, with both campaigns emphasising tariffs rather than a weak dollar policy, strengthens the case for holding the dollar as a hedge against geopolitical risks. “The argument to hold the dollar as a hedge to geopolitical deterioration is strong,” Saravelos adds.

The potential for a Fed easing cycle is perceived as having minimal impact on the dollar's robustness as long as it maintains its high yield status. “As long as the dollar remains a high yielder, we continue to see a potential Fed easing cycle as a bark with no bite for the dollar,” Saravelos asserts. Coupled with resilient global growth, the dollar and FX carry trades are expected to perform well concurrently.

Euro-Dollar Outlook

The EUR/USD exchange rate is expected to remain in a similar range to last year, with a break below 1.05 more likely than a sustained move above 1.10. “We maintain our view that the EUR/USD range will look similar to last year's with a break below 1.05 more likely than a sustained move above 1.10,” says Saravelos.

While European growth has shown improvement, this was already anticipated by market consensus and is offset by the ECB’s earlier easing compared to the Fed, which typically results in euro weakness. “Growth has improved in Europe, but this was already expected by consensus and is counterbalanced by the ECB easing ahead of the Fed,” Saravelos explains.

Additionally, subdued global growth recovery and structural challenges in Germany further limit the potential for a strong euro rally. Germany’s ongoing fiscal tightening and record-low external competitiveness measures weigh heavily on the euro. “Germany's structural challenges and an ongoing tightening in fiscal policy mean external competitiveness measures are at record lows,” Saravelos points out.