(Bloomberg) -- The euro will climb about 10% next year, propelled by broad dollar weakness and a gradual return of euros invested abroad, according to RBC Global Asset Management's 2024 investment outlook.
The European currency will strengthen to $1.21, RBC's Dagmara Fijalkowski and Daniel Mitchell wrote in the Dec. 15 report. Their forecast compares with the median $1.12 seen in the fourth quarter of 2024, according to a Bloomberg survey of banks.
The dollar has been weakening since the end of October and extended declines after last week's release of the Federal Reserve's quarterly outlook, which anticipates a sharper drop in its federal funds rate target for next year than in a previous outlook. Around the same time, European Central Bank President Christine Lagarde warned the bank shouldn't lower its guard in the fight against inflation.
“The tailwind of a broad US-dollar decline will contribute to the euro rally, and so the euro should end the year stronger even in the absence of a rosy European economic outlook,” wrote Fijalkowski, head of global fixed income and currencies, and Mitchell, vice president and senior portfolio manager.
The euro fell 0.3% to $1.0944 on Wednesday, though it has climbed more than 2% against the greenback this year. The Bloomberg Dollar Spot Index has slumped about 4% since the end of October.
Some 4 trillion euros were invested outside the region between 2014 and 2022, when the ECB imposed negative interest rates on European savers, and only “a fraction” of that money has returned, according to the RBC report.
“With short-term interest rates 4.5 percentage points higher than they were 18 months ago, we expect to see gradual and persistent demand for the euro as this money finds its way home,” Fijalkowski and Mitchell wrote. “This allocation shift will accelerate as Europe's economic prospects improve relative to the US.”
The yen will strengthen to 130 per dollar next year and be among the best performing currencies, they said, adding that the forecast “relies heavily” on dollar weakness and an interest-rate pivot from the Bank of Japan. They see the British pound climbing to $1.31 over the next 12 months, also supported by a drop in the dollar.
“For investors to truly embrace the US dollar selloff, however, they will need to see greater economic momentum in the rest of the world rather than simply a less severe slowdown,” according to the report. “The direction and magnitude of changes in the greenback are driven to a greater extent by economic conditions outside of the US.”
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