Leitmotif 7: Breaking point?
The US-Europe divergence is strained and about to stretch further
One of my failed predictions for 2024 (Leitmotif 4) was that sustained US economic divergence with the rest of the world would finally lead to a break in both G10 currencies and relative asset prices. Yet, 2024 was another year of G10 quiescence (apart from the yen) even as the US economy continued to diverge from its peers. Prices cannot divorce from fundamentals forever and as the late Herb Stein said, “That which is unsustainable will stop.”
This year brings an abrupt change that is likely to accentuate those fundamental divergences: the second presidency of Donald Trump. Europe appears at greatest risk given that its fundamentals/price divergence with the US already is stretched and it is highly exposed to stresses from President Trump’s policies. Further, European currencies likely harbor latent market accelerants if ranges break. Is 2025 the year FX and asset prices finally crack?