The latest developments in the EUR/USD market make the US dollar appear stronger than ever, and this against numerous global currencies. This is due to political factors: the results of the US elections and the continued dominance of the Republicans in both houses of the US parliament create the basis for pro-business reforms. Trump’s plan to further reduce corporate taxes and extend existing tax breaks immediately triggered a positive reaction on the US stock markets. Investors around the globe are reacting pro-cyclically: the increased purchase of American shares by foreign investors is leading to increased demand for USD and driving up the price.
European Companies in the US Market: Risk and Return
Some European companies are now being forced to relocate their production sites to the USA in order to benefit from the economic momentum and tax policy there. However, the decision to invest pro-cyclically “because Trump won” is not without risk. The costs of the US labor market are high, and the planned tightening of migration policy could make the labor market even tighter and more expensive. European companies, especially German ones, need to consider that they may be investing at unfavorable exchange rates compared to American companies. This pro-cyclical approach, which is often based on peak USD exchange rates, can affect the profitability of investments in the long term.
The Strong Dollar: Momentum vs. Fundamentals
In the long term, the USD is overvalued against most major currencies.However, the current momentum in the US market and the strong demand for American assets, including cryptocurrencies such as Bitcoin, are keeping the dollar at record highs. The decisive factor here is not so much the actual value of the USD, but rather the confidence and narrative created by the US economy and Trump’s political stability. As long as this momentum continues, the USD is likely to rise further, possibly beyond the EUR/USD exchange rate of 1.02.
Is There a Threat of a Correction Due to Rising Interest Rates?
Over the past 15 years, the USA’s expansionary fiscal and monetary policy has produced many successes. Private households have been able to reduce their debts and the financial markets have benefited considerably. Nevertheless, this development harbors risks: US debt continues to grow and the persistently low interest rate environment could soon be a thing of the past. If long-term US interest rates, especially 10-year yields, rise to over 5%, this could slow down the flow of investment and trigger a significant correction on the stock markets.
And Now?
The appeal of the USD and American investments is currently unbroken, but a return to fundamentals will be inevitable at some point. Rising interest rates and increasing US government debt could dampen growth momentum and ultimately lead to a devaluation of the USD. European companies should therefore exercise caution and consider the long-term effects of the current strength of the USD in their investment decisions.
