Market Comment: Dollar less of a drag on portfolio returns in 2018

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In 2017, the US dollar declined sharply versus the euro. We expect changes in the EUR/USD to be much more subdued in 2018. As such, movements in the currency pair should only have limited impact on portfolio returns, says ABN AMRO’s Mary Pieterse-Bloem.

After a short-lived recovery, the dollar continued its decline in December. Early January, the EUR/USD reached 1.20 again, a level close to its 2017 high. However, we do not expect a repeat of last year’s move. Instead, we expect the dollar to regain some lost ground in 2018 and for the EUR/USD to gradually move lower, to 1.15 around year-end.

We see several factors that may steer the direction of the dollar versus the euro. First, we believe the US Federal Reserve (Fed) will remain on its path of monetary tightening. Our forecast calls for two 25-basis-point rate hikes by the Fed in 2018, whereas the European Central Bank (ECB) is expected to keep interest rate levels unchanged until well into 2019. If the ECB manages to temper expectations on early monetary tightening, this would weigh on the euro. Second, economic fundamentals seem to be more favourable in the US than in Europe. For 2018, we expect 2.7% economic growth in the US, versus 2.5% in the eurozone. This could be beneficial for the dollar. 

Mary Pieterse-Bloem, head Fixed Income at ABN AMRO Private Banking, also points at political risk in Europe: “With the Italians going to the polls in March, there’s a risk of political turmoil resurfacing in Europe – that could translate into downward pressure on the euro.”

Movements in the EUR/USD, however, are expected to be more limited in 2018 compared with last year. Pieterse-Bloem: “For non-US investors holding positions in US equities, the lower dollar had an adverse effect on portfolio returns in 2017. We expect some dollar recovery in 2018, but no sharp directional change. We also think price swings in the EUR/USD will be more muted than last year. Against that backdrop, currency risk will be less of an issue for investors.” 

For Dutch-speaking clients: EUR/USD special

Do you want to read more? Georgette Boele, senior currency strategist at ABN AMRO Group Economics, wrote a special on the EUR/USD that was published (in Dutch) this week: FX Weekly - Euro: goede start geen garantie voor sterke finish

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