It’s hard to be a dollar bull in a world of dollar bears. The answer to the question of where EURUSD will be depends on the composition of the investment portfolios of major players. According to Bank of America, the excess weight of euros in the assets of asset managers has reached 23% on a net basis, which is the highest level since October 2004. Since July 2024, investors have been constantly outweighing the regional currency.
The ECB’s intention to enhance its role in the global financial system by increasing the volume of liquidity provided to other countries can raise the EURUSD even higher. Gold and foreign exchange reserves are also a kind of investment portfolio owned by central banks. And the growth of the euro’s share in its structure has a close correlation with the dynamics of the main currency pair.
Europe needed to be woken up. And Donald Trump did it. The United States’ decline in support for Ukraine has provoked the EU to increase military spending, and Germany to fiscal incentives. The White House’s tariffs have forced us to look for alternative ways to sell European goods. The decline in the authority of the US dollar due to threats to the Fed’s independence has enabled the ECB to promote the euro.
When asset managers increase their share in portfolios, central banks increase their share in gold and foreign exchange reserves, and money flows from the United States to Europe due to the rotation of equity markets, the world around them really becomes a world of dollar “bears.” Moreover, according to 59% of investors participating in the Bank of America survey, Kevin Warsh’s rise to power at the Fed will lead to a reduction in the federal funds rate.
This man is following in the footsteps of Alan Greenspan, who once argued that computers and the Internet will transform work and business. They will stimulate economic growth without fueling inflation. Kevin Warsh says the same thing about artificial intelligence.
He already has opponents. FOMC Governor Michael Barr believes that colossal investments in AI will increase the demand for capital and raise its price. At the same time, households will reduce savings based on expectations of real wage growth. This will raise the cost of deposits and loans. In other words, the Fed’s neutral rate may be higher than expected.
The futures market has not yet abandoned the idea of the Federal Reserve returning to the cycle of monetary expansion only in June, which supports the dollar due to the growing risks of a reversal. Nevertheless, the rebound of the US stock indexes from the bottom reduces the demand for greenback as a safe haven asset.
