The euro, which has been battered by the combination of an austere fiscal policy and accommodative monetary policy, is poised to appreciate against the dollar as the continent loosens fiscal restraints to rebuild its defenses.
The euro depreciated from September to the end of last year while expectations of widening interest rate differentials and expansionary U.S. fiscal policy attracted investment in dollar-denominated assets.
This dynamic was particularly true during Germany’s now two-year period of stagnation.
The period of weakness came on top of the long and slow recovery from the financial crisis that also pushed down the value of the euro.
From 2015 to 2020, the euro more or less range traded as Europe recovered. But what a difference a couple of elections can make.
The dollar went on a tear late last year as the prospect of a new U.S. administration and tariffs on its trading partners took hold.
But by February, Germany was on the cusp of getting new leadership and it became the euro’s moment to appreciate.
Read more of RSM’s insights on the economy and the middle market.
While the U.S. administration and Congress are pushing for austerity, the Germans are now calling for a near-trillion-dollar investment in military and infrastructure.
A Keynesian boost through military spending by Germany and other nations is expected to spur growth in the euro zone and maintain upward pressure on the euro.
