The euro and the U.S. dollar could be trading one-for-one next year as Europe struggles with political uncertainty and the U.S. is expected to go on a fiscal splurge.
In a note late last week, a team of analysts from Goldman Sachs predicted the two currencies will reach parity by the fourth quarter of 2017. The dollar has risen 4.4% against the euro, and 2% against a basket of world currencies since Donald Trump won the U.S. presidential election Nov. 8. The euro is currently trading at $1.06.
Investors have viewed Trump’s proposals to spend heavily on infrastructure, while cutting taxes, as a catalyst for further domestic growth and inflation. They’re also expecting more interest rate hikes from the Federal Reserve to match rising inflation.
At the same time, Europe will potentially have to face a wave of wins for populist candidates and issues that are slated to appear on ballots next year.
Other analysts expect the euro and dollar to reach parity even sooner. “We see $1.05 for euro versus dollar by end of year but a move towards parity within six to 12 months is entirely possible,” said Bilal Hafeez, global head of G10 FX Strategy at Nomura to CNBC.
But a rising dollar is also a sign of greater instability in global financial systems. The Bank for International Settlements argued in research published last week that the greenback has become the best barometer for risk appetite in the global financial industry: The higher the dollar rises, the less willing banks are about lending—resulting in less spending, international trade, and a pull back in the global economy.