TRANSCRIPT
Édouard Desbonnets
Hello and welcome to this weekly podcast of BNP Paribas Wealth Management. I am Édouard Desbonnets, Senior Investment Strategist and I am with Guy Ertz, Deputy Global Chief Investment Officer. Hello Guy.
Guy Ertz
Hello.
Édouard Desbonnets
So we are going to talk about the US dollar. You know, it's been weakening over the course of the past few weeks, despite the high uncertainty around the tariffs and the fact that the new normality is now higher uncertainty. So what do you think? Has the dollar lost its status of safe currency?
Guy Ertz
Well, that's a very good question. And of course, we think it has been the question that has been behind the recent moves. So, yes, there is a gradual questioning of the status of safe currency. When it comes to the dollar, we think two developments have been leading to that.
The first development is the recent discussions about a possible discrimination of international investors when it comes to the possible taxation of income on US assets. The simple fact of raising that question is already something that is damaging for the credibility of the currency. The second element is, of course, linked to the evolution of US debt, which is growing quite rapidly. And of course there is here the budget for 2026 and also the forecast for the coming years that is raising some questions about the sustainability of the US debt.
On that particular issue we had the downgrade of the Moody's agency in terms of rating recently. We also saw some increase of the so-called credit default swap pricing that reflects somewhat higher risk of the probability of default. Now, of course we do not see here the dollar to lose its dominant position. We are not seeing here any major risk, to see the default, but in relative terms, that still has played a role.
So both the fact that there is a questioning about the stability of US debt and of course, the mention about possible discrimination of international investors is, of course, something that has been putting some pressure. And yes, it is questioning to some extent the status of safe-haven currency. It is also interesting to note that in a recent book by Kenneth Rogoff called “Our Dollar, Your problem”, there is a very interesting discussion precisely about that topic.
Édouard Desbonnets
I think it's important that you remind us what the actual drivers are for predicting exchange rate developments?
Guy Ertz
Yes. So, when we look at the traditional drivers of exchange rates, we usually separate two time horizons: the rather shorter time horizon, typically 6 to 12 months, where actually it is the return or interest rate differential that plays mainly a role. And the second dimension then, which is the more long-term driven driver, which is about goods and services and purchasing power parity. And we have some interesting calculations, some estimates about the long-term fair value of the euro/dollar, for example, based on some OECD estimates.
Édouard Desbonnets
So you talked about long-term fundamentals, also the issue of purchasing power parity. What does this measure suggest for the longer term equilibrium value?
Guy Ertz
Yes. So what we have been seeing is that the calculations of a long-term fair value based on purchasing power parity is somewhere around 140, somewhat below 140, the value of one euro. So that suggests that the euro would be having more upside and the dollar then more downside. Now, of course, we have some arguments that also suggest that we will probably not go all the way, typically also because the arbitrage process is also, of course, in that sense, somewhat limited by transport costs of goods, for example.
But really the usual approach here is to see what kind of target level for an exchange rate would be implicit to the exchange rate actually reducing half of the gap between the current euro/dollar and the long-term estimate of the euro/dollar. And if we use the current value of the euro/dollar and this purchasing power parity estimate, half-way would be around 125, 126, which could be reached over a time horizon of say, 2 or 3 years. On a 12-month horizon, we have a target of 120 euros per dollar.
Édouard Desbonnets
All these details are available in our monthly currency focus document, which is available on the Voice of Wealth website. Thank you all for listening to this BNP Paribas Wealth Management podcast. Please share, like and subscribe to our weekly podcast on the platform of your choice. Thank you and goodbye.
Guy Ertz
Thank you. Byebye.
