US Dollar Forecasts 2014: The Year of the USD?
- Written by: Gary Howes
-
Deutsche Bank give their foreign exchange rate forecasts for 2014 which see the US dollar advancing agains the majority of global currencies.
The 7 year cycle of the US Dollar
Since the end of Bretton Woods in the early 1970s, the dollar has followed a long-term cycle with up- and down-trends lasting on average 7 years. The dollar trade-weighted index, however one measures it, appears to have troughed in 2011.
So this would mark the downtrend as lasting nine years, longer than the 1970s downtrend, but shorter than the 1990s one. On that basis, we are currently in the midst of the big dollar turn higher.
So this would mark the downtrend as lasting nine years, longer than the 1970s downtrend, but shorter than the 1990s one. On that basis, we are currently in the midst of the big dollar turn higher.
What will support the US dollar in 2014?
A combination of the long-term dollar cycle, a turn in the Fed cycle and US capital flows, and corrections in overvalued currencies should all support the dollar in 2014
British Pound Forecasts Raised
We are turning less bearish on GBP and meaningfully raising our sterling forecast profile for the coming year. The driver has been the large upside surprise in the growth outlook this year, in turn providing belated interest rate and flow support to the pound.
Early Rate Cuts for the UK
Looking ahead to 2014, the GBP will have a tough balancing act to play amid a very chunky (probably deteriorating) current account deficit driven by improving domestic demand, and better cyclical conditions raising the prospect of earlier than expected rate hikes.
GBP/USD Vulnerable to USD Strength
We expect only moderate depreciation in EUR/GBP as a result of sterling’s flow headwinds, while GBP/USD will also be vulnerable to ongoing USD strength. In contrast, sterling should continue to do well versus other G10 FX, putting it in the group of currency outperforms this year even if this doesn’t materialise versus the dollar.
EUR/USD to reach 1.10
The euro has been one of the stars of 2013, but we expect the trend lower to re-assert itself over 2014.
We forecast EUR/USD to reach 1.25 by end-14 and 1.10 by end-15. A broadly stronger US dollar is the first ingredient to euro weakness, helped by a re-pricing of Fed rate expectations and a bear flattening of the US yield curve from current close to all-time extremes.
We forecast EUR/USD to reach 1.25 by end-14 and 1.10 by end-15. A broadly stronger US dollar is the first ingredient to euro weakness, helped by a re-pricing of Fed rate expectations and a bear flattening of the US yield curve from current close to all-time extremes.
The drivers of euro weakness
On the EUR side, the current account remains the biggest obstacle to weakness but support from elsewhere appears to be turning.
First, short-end rate spreads have moved higher this year on the back of a contracting ECB balance sheet, but with only around 150bn EUR of excess liquidity to go this story has arguably run its course.
Second, port folio inflows have been exceptionally strong, but with flows now back to trend and relative equity valuations vs the US at close to ten year extremes net inflows are also likely to turn back lower.
Finally, the ECB retains a strong easing bias and with the market pricing no likelihood of additional easing in coming months, the risk is of a dovish surprise, as well as a reversal of the year-end funding squeeze
First, short-end rate spreads have moved higher this year on the back of a contracting ECB balance sheet, but with only around 150bn EUR of excess liquidity to go this story has arguably run its course.
Second, port folio inflows have been exceptionally strong, but with flows now back to trend and relative equity valuations vs the US at close to ten year extremes net inflows are also likely to turn back lower.
Finally, the ECB retains a strong easing bias and with the market pricing no likelihood of additional easing in coming months, the risk is of a dovish surprise, as well as a reversal of the year-end funding squeeze