Where the USD and EUR stand

With the US Dollar (USD) regarded as the most valuable currency in the world, and the European Euro (EUR) being its most prominent rival in international markets, the EUR/USD forex currency couple remains of interest. This is particularly true in the case of traders who are vulnerable to fluctuations in this popular pairing. Earlier forecasts for 2021 suggested that the currency pair would steadily increase towards 1.2200, which does not seem too far-fetched given the current standing of the pair.

The USD and EUR are both said to be safe-haven currencies because of their relative stability within the markets and the role they play in the global economy. However, 2020 introduced an unprecedented level of uncertainty and instability, which affected investor confidence and the strength of currencies across the globe. While last year saw the USD weakening, 2021 appears to be telling a different story. Despite a questionable few months, the last four months have been more promising for the USD, particularly relative to the EUR.

Influences on strength of USD

• Three of the key influences on the performance and strength of the USD are the US economy, politics and imports and exports. The higher the economic activity and the stronger the US economy, the stronger the USD will be. This was evidenced by the tumultuous conditions of 2020, whereby economic activity dwindled, not just in the US but across the globe, and was adversely impacted by global conditions. This led to a weakening in the USD.
• Politics also play a crucial role in the performance of the USD, as it affects investor confidence and willingness to trade with the US. Yet again, 2020 was a showcase of this with the presidential election that came with another level of uncertainty and policy changes.
• With the US being the largest importer of good and second to China when it comes to exports, these have a direct impact on the performance of the USD. The dollar is stronger when imports exceed exports as it is a sign of a thriving economy, and the adverse is true.

Reasons why USD is expected to strengthen

As at Monday, 9 August 2021, the USD hit a four-month high against the EUR, reportedly strengthening to $1.1742 to the Euro. Although gradual global economic recovery is being projected by analysts for 2021, following the disruption and worldwide instability experienced in 2020, growth in the US is expected to exceed that of Europe. According to strategists from the Bank of America, a 6% growth is projected in 2021 in the US and a further 4.5% in 2022. This is compared to Europe’s projected 2.9% and 3.4% in 2021 and 2022, respectively.

One of the most notable reasons for the improvement in the strength of the USD is the recent jobs market data, which painted a more optimistic picture of the labour market. The suggestion of a strengthening labour market was further corroborated by Alvin Tan, a strategist at RBC Capital Markets. Tan was quoted as saying, “A strong US employment report on Friday triggered a jump in US bond yields, supporting the US Dollar higher.”