Foreign exchange analysts at Berenberg warn of potential challenges for the US dollar (USD) in the longer-term outlook, citing mounting US government debt and possible debt refinancing issues.
This fiver-year long-term view projects a possible significant weakening of the USD exchange rates.
However, by the end of 2023, analysts predict a substantial appreciation of the Euro-Dollar exchange rate to 1.1200.
The recent trajectory of the EUR/USD has been noteworthy, note the FX strategists.
After a promising climb to 1.1200 mid-year, it subsequently slipped below the 1.1000 threshold.
This descent mirrored Berenberg's prior predictions, with certain influencing factors at play.
A notable influencer is the US's monetary policies and resultant inflation dynamics.
"The US's favourable inflation outlook has played a role." says Arne Christian Rahner, Head of Financial Markets at Berenberg.
"The Fed started its interest rate adjustments sooner than the European Central Bank (ECB)." the analyst adds.
Berenberg's analysis implies that the Euro's prospects, both in the short and medium term, are capped.
Yet, change might be looming.
The alignment of interest rates between the US and Europe, alongside the diminishing appeal of the USD as a secure financial shelter, points to a probable resurgence of the Euro in upcoming periods.
While current and medium-term observations offer mixed signals, a lengthier forecast is shaded with uncertainty.
Overreaching US government debt combined with potential refinancing hurdles can exert downward pressure on the US dollar's strength.
"In the long term (about five years), the risk of the high US government debt and possible problems in refinancing the debt must also be kept in mind." says Rahner.
"A significantly weaker US dollar then appears possible." the analyst adds.
Furthermore, global geopolitical events, like the Ukraine conflict, have had an ancillary effect on financial markets to date.
However, the cessation of this conflict could unleash substantial economic benefits for Europe.
In such a scenario, Ukraine's rehabilitation could function as an economic catalyst for the European Union.
Additionally, the 2024 US presidential elections loom large and might have bearings on the Fed's forthcoming decisions.
These could, in turn, sway the USD's position.
Pivoting to a macroeconomic stance, Berenberg sketches a modest +0.5% GDP growth for the Eurozone in 2023 after previous contractions.
The US's path seems steady, sidestepping a minor economic downturn, but Germany might grapple with a -0.4% contraction.
When it comes to inflation, "Our inflation forecasts for 2023 remain on the downside at 5.6% (euro zone), 6.3% (Germany) and 4.1% (USA)." says Rahner.
Lastly, the everlasting geopolitical tussles, most notably the US-China tensions centred on Taiwan, can't be ignored.
During turbulent times, the allure of the US dollar as a safe haven intensifies.
Such conditions, meshed with sustained high interest rates, make it challenging for the USD to weaken considerably beyond 1.1200 by year's end.
"Coupled with higher interest rates for longer, we therefore consider a significant weakening of the US dollar above 1.1200 by the end of the year to be unlikely," says Rahner.