Euro Downgraded by Schroders

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The euro is downgraded and the dollar upgraded by Schroders, the London-based multinational asset management firm.

The Middle East conflict has materially shifted the outlook for the major currencies, says Schroders in its first multi-asset strategy review since the launch of hostilities at the start of March.

"We have upgraded our view on the dollar," says Patrick Brenner, Chief Investment Officer, Multi-Asset, at Schroders. "The current uncertainty in the Middle East and the US’s position as a net oil exporter means the region is less exposed to the current supply constraints. In addition, cyclical dynamics could be a tailwind to the dollar in the near term."

Founded in 1804, Schroders has £816.7BN under management, and its latest strategy views will inform its active approach to managing investments under its care.

Analysts don't think the current situation is as extreme as 2022, when Russia invaded Ukraine, in that the starting level of interest rates is considerably higher and the underlying level of inflation is lower.

"Nevertheless, we think there is further upside in bond yields and would expect the US 10 year to rise to 4.5%. We also believe there is upside to the US dollar as the US is less vulnerable to the energy shock," says Brenner.

The other big currency view shift regards the single currency: "We have downgraded the euro to negative. We expect the currency to be the main source of selling as investors increase their exposures to the dollar, particularly as Europe has a greater sensitivity to the energy price shock," says Bremmer.

Regarding the pound, Schroders opts to remain neutral. "The macro backdrop remains weak, and the likelihood of anticipated rate cuts from the Bank of England has reduced following upward pressure on inflation due to the rise in energy prices."

That reduction in rate cut bets has offered pound sterling support against most of its G10 peers in March, with GBP/EUR having risen 1.50% over the course of the month.

Elsewhere, Schroders maintains an overweight position in equities but has decided to close the overweight to international value stocks as financials remain vulnerable to rate concerns and the US is likely to be more resilient to any protracted oil price spike.

Strategists remain long gold despite recent volatility, expecting continued structural demand from emerging market central banks and see it as an important diversifier against fiscal and geopolitical risks.