In September, the Euro experienced a significant wave of selling pressure, which continued into October following fresh signs of economic troubles in Europe. Experts are now warning of the potential for parity between the Euro and the Dollar in the coming months, given the sustained elevation of U.S. interest rates.
The EUR/USD currency pair witnessed a 0.79% drop, falling to 1.0487 dollars, as data revealed that manufacturing activity in the Eurozone remained deeply contracted.
MUFG issued its October forecasts and cautioned, "We see an opportunity for further strength in the Dollar, which could push the EUR/USD currency pair toward parity." Parity, where one Euro equals one U.S. Dollar, was last seen in July of the previous year, driven by concerns over energy supply crises and economic challenges.
While the Eurozone's economic woes, particularly the weakness in Germany, have played a role in the Euro's struggles, the primary driving force behind its decline is the strength of the Dollar.
The Dollar index has witnessed an impressive surge, rising over 7% since hitting its lowest levels in July. This strength is attributed to the Federal Reserve's sustained rate hikes, propelling Treasury bond yields to multi-decade highs.
MUFG suggests, "The risks on yields are skewed to the upside looking ahead," and adds that "With the potential for reduced liquidity in the future, we would not be surprised to see a break above 5% or more on the 10s."
Furthermore, MUFG points out that the Dollar's strength could be bolstered if the Federal Reserve decides to raise interest rates in November. The possibility of a November rate hike has gained attention, especially after the narrowly averted government shutdown in the United States, which could have adversely impacted short-term private-sector payroll reports due to government employees not being furloughed.
The prolonged selling pressure on the Euro-Dollar currency pair has led to the erasure of all its gains for the year. However, there is some hope or relief expected at the end of the year or early next year when the effects of higher interest rates and U.S. economic growth are anticipated to exert a more substantial impact.
Goldman Sachs notes that as growth in the United States and Europe slows in the coming months, along with persistent inflationary pressures, these factors may alleviate some of the key pressures that have kept the Dollar elevated for the majority of the year.