The steep appreciation of the euro against the dollar will consolidate around the current level.
That's according to Nigel Turner, CIO at the Forum Finance Group.
With the euro having hit a high of 1.19 last week, and since stabilising around 1.18, the chief investment officer expects that the common currency has hit its peak and is revisiting his current dollar underweight.
‘For EUR portfolios with no dollar exposure, I think it makes sense to somewhat reduce the dollar underweight. As a reminder, the 'natural' dollar exposure of the EUR FFG reference index is of 20%.’
In a note to investors, the independent asset manager's CIO listed the reasons why he foresees a normalisation of the euro.
He put it down partly to the overreach of the euro versus the dollar when adjusted for interest rate differentials, as well as very long speculative market positioning on the euro.
The prospect of further Fed rate hikes, prompted by low US inflation expectations, also factors in. As does a very negative investor sentiment towards the dollar.
Many of the positives have already been priced in to the euro and its appreciation could start to influence the anticipated path of ECB policy adjustments, he said.
Finally, any improvement in the US political climate could trigger renewed hope for some reforms and boost the dollar.
Everything has been going in the euro's favour, Turner said.
Positive political and economic developments have played a large part in restoring investor confidence in the common currency.
With this in mind, the anticipation of flows into European equities has remained strong.
This comes amid more negative political developments in the US than in Europe, bolstering expectations of further growth.
The euro has also strengthened thanks to a compression of the interest rate differential between US and European sovereign debt, despite the recent reversal of this trend.
An unwinding of extremely long dollar positioning at the beginning of the year factors in too, as do expectations that the ECB will start to taper its stimulus program.
The euro has gained from upside revisions of EUR/USD parity targets, Turner explained, especially from euro bears.