The US dollar index reached its highest level in over two years on Monday, propelled by a stronger-than-anticipated jobs report in the United States last week. This surge in the dollar's value is poised to have significant repercussions for various European economies. Analysts forecast continued weakening of the euro and the British pound amidst uncertain economic conditions and the looming threat of new US tariffs under Donald Trump's incoming administration.
Former FX trader and founder of personal finance platform Generation Money, Alex King, highlights the implications of the rising dollar on European economies. Norway stands out as a potential beneficiary, with its income set to increase due to its main exports being priced in dollars. Conversely, the UK may face economic challenges as it grapples with fresh price hikes, which could place its economy in a precarious position. The Bank of England finds itself with limited options to mitigate rising inflation, compounded by increasing government borrowing costs and wage expenses.
"A small European player by size, Norway is set to benefit from a strengthening U.S. dollar as it is a major oil exporter," – Alex King
The euro fell 0.4% to $1.0199 by 12:50 p.m. London time on Monday, marking its lowest value against the dollar since August 2022. Similarly, the British pound dropped 0.8% to trade at $1.2125, its lowest since early 2023. These declines underscore the challenges faced by European currencies as they struggle to gain momentum against a robust US dollar.
Bartosz Sawicki, a market analyst at Conotoxia, anticipates that the US dollar will remain elevated as President-elect Donald Trump takes office once again. He suggests that European currencies may continue to face difficulties in attracting investors and capital inflows due to uncertainties surrounding trade wars.
"I see a high probability of markets behaving in a similar way to what we observed during Donald Trump's first presidency — sharp, volatile moves, but without any really strong trends, so the U.S. dollar will likely stay strong in the short term," – Bartosz Sawicki
In Norway, the krone experienced a modest increase of approximately 0.2% at 7:20 a.m. London time on Tuesday. Norway's sovereign wealth fund, which holds significant exposure to dollar-denominated assets, is expected to see a rise in value. This positions Norway advantageously amidst the current currency dynamics.
"With its main exports priced in dollars, Norway's income will rise. At the same time, Norway's huge sovereign wealth fund has significant exposure to dollar-denominated assets, so this should also see a rise in value." – Alex King
Deutsche Bank projects a range of $0.95 to $1.05 for the euro this year, emphasizing potential new tariffs from Trump as a risk factor. George Saravelos, global head of FX research at Deutsche Bank, remains bearish on both the euro and sterling.
"The external flow picture is weak with rising energy prices and a persistently weak portfolio flow and [foreign direct investment] picture … The hot money carry-driven FX inflows that supported [sterling] last year are at risk of turning." – George Saravelos
The UK faces potential economic challenges as it contends with fresh price rises that could destabilize its economy. The Bank of England finds itself constrained by limited options to address inflationary pressures, exacerbated by rising government borrowing costs and increasing wage demands.
"Bank of England pricing is at peak hawkishness with risks skewed towards more cuts given the weakening in the data flow," – George Saravelos
The Swiss franc trades within the middle of its five-year range, with expectations that the incoming US administration will be less tolerant of FX intervention. Saravelos expresses optimism for the Swiss franc's performance.
"Over in Switzerland we are bullish the franc," – George Saravelos
"It is unlikely the SNB aggressively pushes back on franc strength, allowing it to outperform," – George Saravelos