The weak dollar is here to stay
The euro appreciated by more than 10% against the US dollar in the first five months of the year. This was due to concerns about spiraling US government debt, Trump’s erratic economic policy, the robust economy in the eurozone and the prospect of increased fiscal spending on the old continent, especially in Germany. In the coming months, US fiscal policy (keyword: Section 899), economic data and central banks are likely to be the most important factors influencing the euro-dollar exchange rate, alongside trade policy. The market currently expects the Fed to cut its key interest rate twice more by the end of the year, by 25bp each time. However, we see no scope for further monetary easing by the US Federal Reserve due to persistent inflationary pressure. If the market’s expectation of persistently higher interest rates in the US prevails, the dollar could benefit. On the other hand, the US economy is likely to lose further momentum in the coming months, while the eurozone could gain some traction. This would in turn favour the euro. The opposing effects are likely to cancel each other out. Overall, we therefore expect the euro-dollar exchange rate to trend sideways until the end of the year. In the long term, however, the dollar is likely to come under even greater pressure due to the loss of confidence in the US caused by Trump. This is particularly true given that the Trump administration itself is also aiming for a weaker US dollar.
Dollar loses ground despite growing interest rate differential against the euro
Donald Trump’s disastrous economic policy weighs on the greenback
BoJ caught between rising inflation and economic concerns
Japan’s core inflation rate stood at 3.5% in April, well above the target of 2%. This would normally call for further key interest rate hikes. At the same time, however, US tariffs are having a negative impact on the economy. Japan is particularly hard hit by the tariffs on cars. In addition, the slowdown in the Chinese economy due to the tariff dispute with the US is also having a negative impact on demand for Japanese products. The Bank of Japan (BOJ) will therefore raise its key interest rate only very slowly. This could nevertheless give the Japanese yen some tailwind for the rest of the year, as all other major central banks in industrialised nations are currently leaving interest rates at their current levels or even lowering them further. In addition, the yen continues to benefit from its status as a safe haven in times of uncertainty.
Japanese yen to benefit from further interest rate hikes
BoJ cautiously raises interest rates
Exchange rate forecasts
Berenberg and consensus forecasts compared, figures for the end of 2025 and mid-2026
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