USD / EUR exchange rate: Expectations and risk premiums are main drivers, not yield spread
News from 2018-06-11 / KfW Research
Since the beginning of 2017, the euro and US dollar yield spread can no longer explain the USD / EUR spot rate. The yield advantage of the US dollar is rising steadily and making the greenback increasingly more interesting for investors but the euro is appreciating in trend. In fact, other factors are currently dominating exchange rate developments – exchange rate expectations and risk premiums for unexpected euro depreciation. The exchange rate expectations which increased from early 2017 until April 2018, in turn, are driven by the expectation that the US dollar yield advantage will diminish in future. Consequently, the recent euro weakness should be overcome when investors’ nervousness regarding Italy fades and the ECB confirms the exit from its unconventional monetary policy.