The Euro is under significant downward pressure, and many analysts believe the European single currency is on its way to parity with the Dollar. This doesn’t necessarily mean a Brexit-style currency collapse – but rather a slow and steady decline based on the interest rate differential between the United States and Europe.
When interest rates go up, the Dollar becomes a higher yielding asset that is more profitable to hold in the bank or use to buy U.S-listed investments – which also yield more when interest rates are higher. This results in what is called a carry trade. Investors in Europe and Asia sell their Euros and Yuan to buy Dollars so they can benefit from the higher rates. This increases the value of the Dollar relative to other currencies.
Europe’s economic situation is too tense for the European Central Bank (ECB) to seriously consider taking a hawkish course of action with rates. Such a move would risk the fragile growth of the continent. Consequently, Euro rates will stay flat while the Dollar’s rates increase, and the Euro will fall against the Dollar.
Donald Trump is known to hate a high Dollar. His presidential campaign was based on fixing America’s trade imbalance and forcing countries like China and Japan. Keeping the Dollar suppressed will be a major goal of the Trump administration. In addition, inflation looks set to pick up in both Europe and the United States. Inflation may rise fast enough to negate the influence of rate hikes on precious metals prices.