Dollar Forecasts 2015: USD Exchange Rate Call vs Pound, Euro, Yen and Canadian Dollar

The rally may be a few months late but it would appear growth fundamentals in the United States are finally turning supportive.

"Growth in the US is shifting higher while growth in the Eurozone is shifting sideways with a risk that it turns worse if the last drop in Italian GDP is a harbinger of something more nefarious," says a note looking at the US dollar outlook issued by TD Securities.

Before we look at the 2014 to 2015 forecasts, here are the latest spot levels for reference:

• The pound to dollar exchange rate (GBP/USD) 0.15 pct higher on a day-to-day comparison @ 1.6812.
• The euro to dollar exchange rate (EUR/USD) 0.14 pct down @ 1.3367.
• The dollar yen exchange rate (USD/JPY) 0.03 pct higher @ 10222.
• The US to Canadian dollar rate (USD/CAD) 0.04 pct higher @ 1.0927.

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Why is the dollar forecast to advance?

Despite a disappointing start to the year, global economic momentum is set to continue accelerating during 2014 and 2015.

"Rapidly improving economic fundamentals are likely to help US growth performance lead the G7 pack as Japan and the Eurozone lag, allowing the Fed to begin paring back monetary policy sooner," say TD Securities in the their latest analysis of the US economy.

It is the timing of the interest rate hike that remains fundamental to the dollar's movement.

Falls for the euro dollar forecast in 2015

An improving US economy naturally translates into a bullish currency.

"With markets currently looking for the Fed to begin hiking rates in mid-2015, diverging growth and policy dynamics should lead to a further strengthening in the USD against a broad swath of currencies," say TD Securities.

Above, forecasts for USD against the majors from 2014 through to 2015, image courtesy of TD Securities.

In particular, with investors expecting further ECB QE and the likelihood of additional BoJ QQE remaining elevated, TD Securities say they expect the EUR and JPY to lose further ground, falling to 111 and 1.22, respectively, by the end of 2015.

Interest rate hikes and the end of quantitative easing

Markets are currently predicting the Fed quantitative easing programme (QE) to end in October 2014 with the first rate hike likely to occur in H2 2015.

According to TD Securities Fed Chair Yellen needs affirmation that a “false dawn” is not lurking in the shadows, sentiment governed by a risk-based policy regime that recognises the risks to low inflation and low growth are still higher than the other way around.

Evidence is mounting that a better outcome is evolving.

"This is enough to sow the seeds of the next stage of the cycle, but actual rate hikes will be governed by need to nurture growth and higher inflation. This imperative will prevail over a more dovish FOMC in 2015," say TD.

However, the bullish forecast for the dollar against the British pound, euro and other major currencies could be compromised should inflation expectations started to turn lower.

TD Securities say:

"We suspect the market’s timing of the first rate hike is likely to come in as the Fed turns less dovish in September/October period, growth momentum persists, and wage inflation becomes more evident.

"That creates opportunities as Yellen is not likely to move that soon given a lack of budding inflation pressures.

"If we are wrong, it will be driven by the perception that inflation expectations become unanchored. Judging by the 5y5y forward breakeven inflation rate, that is not the case, but any sustained move north of 3.0% would be viewed as a risk to hard won inflation credibility."