LONDON BNP Paribas Markets 360 reckons the euro could rally against the dollar if there is a global recession, marking a break with past trading dynamics.

Sam Lynton-Brown, global head of macro strategy at the bank, gives a number of reasons for what he describes as one of the team's controversial views.

This includes the dollar being used as a high-yielding currency, which has historically not been the case, meaning the dollar is more vulnerable to falling as US interest rates come down. The Federal Reserve pushing rates further above their neutral level than many other central banks is another factor.

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In addition, Lynton-Brown said the euro and peripheral government bond spreads in the currency bloc have become less sensitive to risk-off periods, a positive for the euro.

Euro/dollar is the most actively traded currency pair in the US$7.5 trillion a day global currency market and the drivers behind its direction are tracked by investors globally.

"If the US were to enter a hard landing, it would make us even more bullish on the euro/dollar," said Lynton-Brown.

BNP Paribas Markets 360's base case is for an economic soft landing.

It forecasts the euro/dollar to rally to US$1.15 by end-2025, implying a gain of just over 3.5% from current levels around US$1.11.

A Reuters poll recently forecast the euro to trade around US$1.12 in a year.

The US Federal Reserve is widely expected to lower interest rates for the first time in four years on Wednesday and could even deliver a half-point cut. Speculation over an outsized cut has already hurt the dollar and any signs the US economy is slowing more quickly than anticipated - especially the labour market - could stoke recession worries.

  - Reuters