Wells Fargo Investment Institute on Tuesday published updated currency projections that anticipate further U.S. dollar strength persisting into the end of 2027.
In the firm's new baseline, the euro-dollar exchange rate is expected to trade between $1.10 and $1.14 at year-end 2027, down from its prior range of $1.17 to $1.21. For the yen, Wells Fargo moved its dollar-yen target to ¥160-¥164 from a previous ¥158-¥162 projection. The bank also raised its target for the ICE U.S. Dollar Index to 100-104 from 95-99.
The adjustments reflect Wells Fargo analysts' view that the Federal Reserve will add a full percentage point of rate increases into 2027. By contrast, the Institute expects the European Central Bank and several other central banks to either maintain current policy settings or ease rates, as their earlier tightening is projected to slow economic activity next year.
The revised outlook follows two developments highlighted by the analysts: an August Producer Price Index report that signaled persistent inflationary pressure, and the Fed's September 16 rate increase. The firm also referenced short-term interest rate futures, noting that expected U.S. short-term yields outpaced comparable eurozone rates in the period from September 1 through September 24.
Wells Fargo's team said that larger interest rate differentials between the United States and other developed economies should draw international investors toward U.S. assets. The analysts expressed confidence that the U.S. economy can tolerate higher borrowing costs, which they see as giving the dollar an advantage against other major currencies.
In addition to policy dynamics, the analysts cited continuing geopolitical risks and business technology spending as potential sources of upward inflation pressure. Those factors, in the bank's assessment, could prompt the Fed to raise rates further.
Summary
Wells Fargo Investment Institute now expects a stronger U.S. dollar through the end of 2027, lowering its euro target range to $1.10-$1.14, raising its dollar-yen target to ¥160-¥164, and lifting its ICE U.S. Dollar Index projection to 100-104. These changes are driven by an anticipated additional 100 basis points of Fed tightening, recent inflation data, and widening short-term yield gaps versus the eurozone.
Key points
- Wells Fargo trimmed its year-end 2027 EUR/USD target to $1.10-$1.14 and raised USD/JPY to ¥160-¥164.
- The firm forecasts an ICE U.S. Dollar Index of 100-104 versus a prior 95-99 range.
- Expectations for an extra full percentage point of Fed hikes into 2027, alongside ECB and other central banks holding or cutting, underpin the outlook.
Risks and uncertainties
- Inflation persistence: The August Producer Price Index showed elevated inflation, which could influence the path of Fed policy.
- Central bank divergence: The outlook depends on the Fed delivering further rate increases while other developed central banks keep rates steady or ease.
- Geopolitical and corporate spending dynamics: Ongoing geopolitical risk and shifts in business technology spending are cited as factors that could sustain inflationary pressure.