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IN BRIEF

  • Overvaluation of the U.S. dollar, which had reflected divergences in the cyclical positions between the U.S. and other economies, has begun to unwind amid low inflation and a Federal Reserve moving in slow motion. Unwinding USD strength historically takes around seven years, and we see continued USD weakness over our forecast horizon, even after the retracement from last year’s levels.
  • While the euro has moved off its cyclical lows, it remains well below fair value. We expect that eurozone economic data—strengthening growth, current account surplus and inflation below the U.S. level—will boost the euro over our forecast horizon.
  • Uncertainty surrounding the outcome of UK negotiations to exit the European Union (EU) suggests that forecasts for sterling should reflect a modest increase in Brexit-related risk premia as well as an increase in the downside risks to the UK economy over the medium term. We have slightly lowered our long-term fair value assumption for sterling.
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Our assumptions continue to point toward future U.S. dollar weakness, even after the retracement from last year’s levels

ASSUMPTIONS FOR SELECTED CURRENCY EXCHANGE RATES-NEXT 10-15 YEARS

(According to market convention, CURRENCY A/CURRENCY B means one unit of CURRENCY A is worth the stated number of units of CURRENCY B. EUR/USD = 1.30 means EUR 1.00 is worth USD 1.30)

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Source: Bloomberg, J.P. Morgan Asset Management, estimates as of September 29, 2017.
*For consistency and ease of conversion, we have assumed that the forecast horizon for the per annum change in percentage terms is 12.5 years.
 

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ABOUT LONG-TERM CAPITAL MARKET ASSUMPTIONS

Our Long-Term Capital Market Assumptions are part of a deeply researched proprietary process that draws on in-depth quantitative and qualitative inputs from experts across J.P.Morgan Asset Management. We, and many of our clients, rely on the output as a foundation for multi-asset class investing.

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