From Morningstar: 2024-10-09 10:10:00

The Euro has rallied against the dollar in the past two quarters, strengthening from 1.06 to 1.12 between April and September. Negative sentiment in the US, including cooling labor market data and falling oil prices, has contributed to this trend according to T. Rowe Price Chief European Economist Tomasz Wieladek. Claudio Wewel, FX Strategist at J. Safra Sarasin, notes that the EUR-USD exchange rate has closely followed the yield of 10-year US Treasuries in recent months.

With both the Federal Reserve and the ECB beginning monetary easing, the future movements of the euro in Q4 are uncertain. Market expectations for the Fed to cut rates more aggressively than the ECB could lead to a stronger euro, but relative cyclical dynamics in the euro area suggest the euro may grind lower in the near term. Analysts do not see much room for growth for the euro against the dollar.

The outcome of the US Presidential election could greatly impact the future EUR/USD level, with economic policy uncertainty surrounding trade policies. A Harris victory could see a settlement at 1.15, while a Trump victory may lead to a settlement at 1.05, according to T. Rowe Price’s chief economist. A stronger euro could impact Europe’s export-reliant industries negatively, but raise consumer disposable income positively.

Investors should consider focusing on domestically oriented firms in the event of a stronger euro. However, FX Strategist Wewel is skeptical about growth tailwinds from the FX side in 2025, as most developed countries are expected to experience higher growth than the euro area in the coming year. Movements of the euro against other currencies can have significant effects on assets and investments held by eurozone investors.

To hedge against currency risk, investors can consider mutual funds or ETFs that offer a hedged share class to minimize the impact of currency movements on final returns. However, hedging is not perfect and can result in deviations in performance. Retail investors may opt for the unhedged option, particularly in global funds with exposure to multiple currencies moving in different directions.



Read more at Morningstar: The Euro’s Rally May Be Over. What’s Next?