"Significantly Stronger Dollar" Forecast by Soc Gen

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"Dollar bears, surfing a wave of easy Fed policy, are running out of time. If the US can escape the clutches of the zero-rate bound, it will earn itself a significantly stronger dollar," says Kit Juckes, Macro Strategist at Société Générale.

The call is made in a mid year research and strategy review of the currency markets and comes at an important juncture for the U.S. Dollar which enters the second half of the year having been the best performing currency in the G10.

Dollar strength was ignited by the Federal Reserve's June policy review at which members of the Federal Open Market Committee brought forward the timing they expected the first interest rate to occur.

The move contributed to a rise in U.S. yields and the Dollar and leads Société Générale to say the lows in the Dollar could now be in.

Above: Dollar performance in June.

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"The June FOMC meeting shifted the market focus from the Fed tapering asset purchases, to when it will start raising rates. Short-dated yields rose and took the dollar up with them," says Juckes.

Although Juckes and his team hold a more constructive outlook for the U.S. Dollar, some patience might be required as a more concerted impulse of Dollar appreciation will take some time to materialise.

"But on the Fed’s new timing it will still be two years before a rate hike is enacted and there will be plenty of twists in the tale before then. We are more confident that the Fed has boosted FX volatility, than that they have turned the dollar cycle around yet," says Juckes.

"But dollar bears, surfing a wave of easy Fed policy, are running out of time," he adds.

The analyst says if U.S. data remain strong, inflation doesn’t fall back quickly and other markets don’t react so violently as to give the Fed serious pause for thought, it’s hard to see why the Fed shouldn’t move ahead with tapering, while continuing the debate about when to start the rate-hiking cycle.

"If that happens, the dollar has likely already passed its lows for this cycle," he adds.

Société Générale are looking to soon announce a notable update to their forecast targets but Juckes says EUR/USD 1.10 is more likely than 1.30.

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