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Euro vs US Dollar: battle for status of funding currency

When markets are gripped by high volatility, investors are caught between a rock and a hard place: which currency should they bet on - the euro or the US dollar? Investors have to pick a proper funding currency. It is a means of payment necessary to open carry trades in emerging markets. In other words, funding currencies are used to exchange against the asset currency. Most investors are leaning towards the US currency

Euro vs US Dollar: battle for status of funding currency

Citigroup Bank chooses greenback as funding currency

Despite the long-term decline of the US dollar across the board, many investors and banks remain loyal to the main reversal currency. Analysts at Citigroup Global Markets Inc. are also among the supporters of the US currency. They prefer dollars when executing carry trades in emerging markets. According to the bank's strategists, during periods of global economic recovery, the greenback usually weakens more than the euro. At the same time, Citigroup Bank expects a faster recovery of the US economy compared to the European one. However, this is not enough for a long-term strengthening of USD, analysts underline.

Euro vs US Dollar: battle for status of funding currency

Union Bancaire bets on USD

The shattered position of the greenback did not affect the decision of Union Bancaire to choose USD as a funding currency. Importantly, the US dollar has been declining since the second quarter of 2020. Back then, the Federal Reserve cut interest rates to a record low and the US economy was trying to pull through the coronavirus-driven crisis. According to analysts at Union Bancaire, the Fed will keep rates near zero in the near future, which will prevent further strengthening of the greenback. The European currency is also going through a tough period. In recent weeks, it has fallen significantly. It even nosedived below 1.2000, but then quickly recovered. Besides, investors do not expect a quick and stable revival of the European economy.

Euro vs US Dollar: battle for status of funding currency

Danske Bank picks EUR as funding currency

The recent slight decrease of the European currency was followed by its strong rise. Although its rally was short-lived, analysts are confident that the euro will eventually resume the upward movement. Currency strategists at Danske Bank believe that the euro will weaken due to the uneven pace of recovery in the European and American economies, as well as due to a possible tightening of monetary policy in China. Such a scenario will jeopardize demand for goods from Germany. China is one of the most important markets for the euro area. Danske Bank expects the euro to fall to 1.1600 over the next 12 months.

Euro vs US Dollar: battle for status of funding currency

JPMorgan believes in bright future of EUR

Currency strategists at JPMorgan Chase & Co. recommend market participants add more euros to their portfolio amid an increase in US Treasury yields. They also assume that this will reduce the amount of funding in US dollars in terms of pro-cyclical transactions. JPMorgan analysts highly advise increasing investments in the Russian and European currencies.

Euro vs US Dollar: battle for status of funding currency

Aviva Investors buys up both currencies

Analysts at Aviva Investors choose both currencies. The firm's currency strategists have picked the US dollar as the main funding currency for the carry trades. Yet, they are looking for ways to benefit from the euro as well. According to experts, in the near future, the greenback will drop due to its overbought status. The US currency usually weakens during an economic recovery, experts pinpoint. Apart from this, it will be rather difficult for the greenback to resume the upward movement due to the mounting public debt and trade deficit in the United States, Stuart Ritson, a senior emerging markets portfolio manager at Aviva Investors, highlights. At the same time, the company increased its amount of funding in EUR to minimize the risks from the short-term rise in the US dollar.

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