Not everyone invests in the financial markets, but our lives
and well-being are often influenced by what happens in them, especially
regarding currencies. Maybe not always directly, but still.
For example, when a currency depreciates, imported goods
become more expensive, increasing overall inflation. This, in turn, can lead to
a reduction in real wages as a result of higher prices.
On the other hand, the ECB estimates that a 1% increase in
the nominal effective exchange rate of the euro usually translates into an
average fall of 0.51% in import prices across the euro area.
This suggests that it is essential to diversify your savings
rather than putting all your money in one currency or investment. Bonds, in
addition to fiat currencies, can be an interesting alternative.
In the United States, for example, the so-called Treasury
Inflation-Protected Securities, known as TIPS, are issued to protect the
investor’s capital from depreciation in a highly inflationary environment.
As for corporate bonds, investment-grade bonds remain
attractive because of their relatively high yields, low to moderate credit
risk, and expectations that the Federal Reserve will cut interest rates.
What is the outlook for the two major currencies?
As always, opinions vary. Some believe the DXY could fall by around
30% in the next few years due to ongoing de-dollarization, high government
debt, and falling interest rates.
On the flip side, some analysts, like those at Morgan
Stanley, forecast a 7% drop in the euro and even a potential parity with the
dollar, citing increasing political risks, economic weakness, and ECB
policies.
As always, only time will reveal who is right. In the
meantime, let’s delve into other factors that could strengthen the dollar and
weaken the euro beyond what has already been discussed.
For this scenario to take place, Trump would have to win the
election and then, as he promised in his campaign, apply 100% tariffs to
countries that do not use the dollar in trade.
At the same time, growing political uncertainty in Europe,
particularly with the tensions in the French government and rising right-wing
sentiments in Germany, could put further pressure on the euro.
The global financial crisis could also trigger a plummet in the EUR to USD
rate, as was already the case in 2008. So far, however, economies seem to
remain resilient, and there is no hard landing in sight.