These recent actions in the foreign exchange (FX) markets represent a significant policy turn. This shift is accelerated by the thawing of tensions between the U.S. and China. This was on top of the lowering of tariffs, set during the Trump administration, undercutting U.S.-China relations. In light of this, the two countries took a much more collaborative approach to negotiations. Look at the past month, 75 basis points of roughly continuous reversal in FX markets. This change has had a tremendous impact on other currencies, such as the Swedish Krona (SEK) and Euro (EUR).
This gesture of goodwill comes through the easing of tariffs and has been a crucial step in the path toward better US-China relations. This unexpected unity has drastically changed how both sides approach negotiations. That encourages better quality discussions and mitigates the negative shroud of unpredictability that has historically hung over global trade. This has triggered a wave of positioning reconsideration among investors across most major currencies. This reorientation has led to significant movements in FX markets lately.
Impact on Currency Markets
The SEK has especially profited from the turn of capital from US assets to European ones. This trend has been unwinding in favour of the Swedish currency against a dynamic of weak growth prospects for many other economies. Yet for all of this favorable inflow, the SEK now contends with pressures arising from its own, admittedly robust economy. As a result, analysts warn that the dour growth outlook in Sweden more than offsets the positive impacts of substantial capital inflows. That’s a difficult environment for any currency to be in, let alone a new one.
In line with forecasts the EUR/SEK will stay on a mildly rising trend over the next months. Analysts expect the EUR/SEK exchange rate to be broadly stable over one to three months. They are predicting it to slowly increase to 11.20 in the next year. As with any forecast, this plays out both recent trends and expected change in the larger economic environment.
Structural Challenges Ahead
Yet, for all these rosy projections, structural challenges await just over the horizon. Greater political uncertainty in Washington and Brussels. Currency politics has emerged as a major theme in markets of late. Second, trade policy uncertainty has upended investor sentiments and decision-making, injecting further volatility into currency markets.
Secondly, capital rotation out of US assets continues to represent a risk to the USD in the longer term. If this trend continues, experts point to significant downside for the USD in the future. It will be the balance between international capital flows and economic fundamentals that drive the future currency valuations one way or the other.
Potential for USD and EUR Fluctuations
The downward trend for the USD appeared to stall recently, bolstered by a shift in risk sentiment following tariff reductions. If capital rotation continues and a sharp recession occurs in the US, the EUR/USD could break significantly higher than current forecasts. Such moves would not only constitute a major recalibration in bilateral relations, but they would have the potential to upend global market realities.