NEWS / Foreign Exchange

New high beckons for EUR/USD; and for EUR/CHF

Summary and conclusions

• Our Q2 forecast for a rise in EUR/USD to 1.36 has now been met. Several - if not all - of the drivers that persuaded us to forecast a weaker dollar still appear valid. On top of that, we worry that a rise in US protectionism will add to a structural risk premium in the coming months. Our medium term positive view on USD has been closely aligned with our macro view that the US would outperform Europe in the second half of the year. This view seems increasingly to be at risk. Further, we think there is a risk that a more violent dollar sell-off is in the process that could take EUR/USD well above the previous high of 1.3670 from December 2004. We are lifting our 3m forecast for EUR/USD from 1.36 to 1.38.
• Although Swiss National Bank Chief Roth repeated his concerns on the weak CHF and its possible inflationary effect in connection with last weekend ???s G7 meeting, he did not sound overly worried and certainly did not give the impression of a man standing ready to hike rates over and above what we currently expect from the SNB. As we currently expect markets to continue to focus squarely on relative interest rates and ignore other potential FX drivers such as valuation and external balance issues, CHF looks set to weaken further in the months ahead. We are thus revising our EUR/CHF forecast higher and now expect EUR/CHF to trade at 1.66, 1.64 and 1.63 in 3, 6 and 12 months time.