Welcome to CoinDesk’s Weekly Macro Column

Analyst Omkar Godbole shares his macro observations regarding broader markets. The views expressed in this column aren’t investment advice.

EUR/USD Surges

A major currency pair, traditionally seen as stable, is rivaling bitcoin’s explosive price performance. In June, EUR/USD, the most liquid FX pair globally, climbed nearly 4% to 1.1786, surpassing bitcoin’s 2.4% gain. Both assets have shown over 13% growth year-to-date, with some believing EUR/USD still has potential for further increases, bolstering EUR-pegged stablecoins.

Marc Ostwald, chief economist at ADM Investor Services International, suggests EUR/USD might encounter resistance around the 1.22/1.23 level, driven by Germany’s easing of its debt brake, seen as a growth-positive move.

Shifting Dynamics: U.S. to Germany

The narrative of U.S. exceptionalism, underpinning dollar attractiveness due to fiscal spending during Biden’s era, is showing signs of reversal. Budget deficits and rising debt-servicing costs have led to a perceived “fiscal scare” in the U.S. Meanwhile, Germany has embarked on a comprehensive fiscal plan, exempting significant defense spending from the debt ceiling and launching a 500 billion euro infrastructure fund aimed at stimulating growth.

This shift could alter investment focus from U.S. to European assets, particularly as Germany ramps up defense and infrastructure expenditure, leading to more portfolio reallocation.

Changing Market Indicators

The historical connection between the EUR/USD exchange rate and the U.S.-German yield differential has weakened since late March. Higher U.S. yields no longer signify a robust economic outlook but are necessitated by fiscal deficits. As such, the dollar’s behavior appears increasingly detached from interest rates, with the need for a premium to offset policy uncertainties.

The landscape is likely favoring the euro, especially as the European Central Bank (ECB) might be nearing the end of rate cuts while the Federal Reserve may need to consider reductions to support sluggish growth, widening the rate differential in favor of the euro.

Enhanced FX Hedging Needs

The traditional role of the dollar as a hedge for foreign investors in U.S. equities is evolving. As the correlation weakens between U.S. stocks and the dollar, European investors, holding significant stakes in U.S. equities, are increasing FX hedging to protect returns against dollar depreciation. A higher FX hedge ratio among European funds may prompt further euro buying and dollar selling, contributing to continued strength in the EUR/USD pair.

In summary, as the economic narrative shifts and hedging strategies evolve, EUR/USD may thrive amidst ongoing global market changes.