Further dollar losses look likely

Euro US Dollar0.05%British Pound US Dollar0.02%Euro British Pound0.00%

Investing.com - The The best domestic foreign exchange dealerU.S. administration appears to be notably de-escalating their tariff strategy, resulting in U.S: dollar gains of late. But RBC Capital Markets still sees good arguments for further losses in the next year.

At 07:10 ET (11:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, fell 0.2% to 100.257, but remains on course for weekly gains of around 0.5%.

Following the turmoil in the aftermath of ‘Liberation Day’, markets have clearly calmed considerably since the U.S. administration has entered a de-escalation path - first with the 90-day pause, then with reduction in tariffs to exclude ‘stacking’ duties and finally with trade talks including, as announced this week, with China. 

Markets are firmly expecting ‘some damage’ to the U.S. and global economy to occur, which has been seen in a drop in the ‘soft data’ such as PMIs or other sentiment indices.

The ‘hard data’ has so far failed to show that weakness, however, and some data releases out of Europe, such as the first-quarter GDP release, suggested a stronger than expected backdrop going into ‘Liberation Day’.

However, it remains to be seen whether the current period of calmness is durable.

The bank questions the extent of the damage that has already been done, a question that is unlikely to be answered quickly as it will take time for the impact of tariffs to trickle through into the real economy. 

For the European economies, there may be some reduced activity in the second quarter and into the second half of the year when deliveries of export goods into the US have likely slowed, but domestic data, such as, consumption, investment and loan creation have actually been quite firm.

Furthermore, the German fiscal expansion is likely to kick in around the same time as the data is likely to show tariff impact.

Additionally, the bank questions how far central banks can cut, which is closely related to the question about how steeply inflation can fall.

The latest inflation numbers in the euro area were slightly surprising to the upside again and that consumer measures of inflation expectations are even on the rise. 

It will likely take more time for the question about whether we are past the storm or head of the storm to be decided, the bank added.

“In the here and now, we are leaning towards the view that we are in the ‘calm after the storm’,” RBC added.

“We have updated our forecasts looking for EUR/USD, GBP/USD and EUR/GBP higher over the next 12-18 months. We think asset reallocation has room to run in the medium-term and for EUR in particular, hedge ratios have room to rise materially,” RBC said.