According to RBC Global Asset Management’s 2024 investment outlook, the euro is projected to experience a substantial uptrend of around 10% in the coming year, primarily driven by a widespread decline in the value of the US dollar and the gradual repatriation of euros invested abroad. In their report dated December 15, RBC analysts Dagmara Fijalkowski and Daniel Mitchell forecast the euro to strengthen to $1.21, deviating from the median projection of $1.12 in the fourth quarter of 2024 as per a Bloomberg survey of banks.
The US dollar has been on a weakening trend since late October, with further declines occurring after the Federal Reserve’s recent quarterly outlook, which indicated a more pronounced decrease in its federal funds rate target for the upcoming year compared to the previous outlook. Simultaneously, European Central Bank President Christine Lagarde emphasized the need to remain vigilant in combating inflation.
RBC’s Fijalkowski and Mitchell noted that the anticipated broad decline of the US dollar would act as a tailwind for the euro’s rally. They emphasized that even without a particularly optimistic economic outlook for Europe, the euro is expected to conclude the year on a stronger note.
On Wednesday, the euro experienced a 0.3% decline to $1.0944, but it has already demonstrated a more than 2% gain against the US dollar throughout the current year. In contrast, the Bloomberg Dollar Spot Index has witnessed a roughly 4% decrease since the end of October.
The RBC report highlights that a significant amount of euros—around 4 trillion—was invested outside the Eurozone between 2014 and 2022, especially during the period when the European Central Bank imposed negative interest rates on savers in the region. Only a fraction of this capital has returned, and RBC anticipates a gradual and persistent demand for the euro as this money repatriates, particularly with short-term interest rates significantly higher than they were 18 months ago.
The analysts expect this trend to intensify as Europe’s economic outlook improves relative to the United States. Additionally, RBC predicts that the Japanese yen will strengthen to 130 per dollar in 2024, positioning it among the top-performing currencies. The British pound is also anticipated to climb to $1.31 over the next 12 months, supported by a weakening US dollar.
The report concludes that for a substantial US dollar sell-off to gain widespread investor acceptance, there needs to be a more robust economic momentum worldwide, rather than merely a less severe slowdown. Economic conditions outside the US are deemed to be the primary drivers of the direction and magnitude of changes in the US dollar.
