Dollar Forecast 2015: USD Exchange Rates Could be 3 pct Overvalued Warns Analysts at TD Securities

Hopes that the impressive US dollar rally of 2014 will finally start showing some fatigue remain unfounded.

The saying 'the trend is your friend' must by no means be ignored at this stage and as a result the USD remains a firm favourite amongst forecasters and traders with a view into 2015.

The dollar's recent 12 consecutive weeks of gains is a record for the greenback and there appears little at the current time that will be able to stand in the USD's way.

That said, there are contrarians out there, and a pause may be in the offing. More of this below.

But first, today's dollar exchange rates:

The euro to dollar exchange rate conversion is 0.04 pct lower on a day-on-day basis at 1.2655.
The pound to dollar exchange rate conversion is 0.05 pct lower at 1.5892.
The US dollar to Canadian dollar rate conversion is 0.64 pct higher at 1.1369.

If you are holding out for a better exchange rate DON'T HESITATE - ensure your provider has the correct buy orders in place to snatch the best possible rate.

Also note that an independent provider could under-cut your bank's rate and deliver up to 5% more FX in some instances. Find out more.

The US Dollar is 3% Overvalued

Current forecasts regarding the USD at the present time all hinge on interest rate expectations in the United States.

When in 2015 will the Federal Reserve raise rates?

The dovish FOMC minutes released this October sparked selling of the USD as markets got the hint that the Fed was not aiming to bring its first rate hike forward.

Stocks surged, US rates dropped and most commodity prices ticked higher.

"This is the mirror image of the market mood just 24-hours earlier when oil prices hit a 17-month low, the S&P completed one of its worst sessions of the year and the US 10-year dropped below 2.35 for the first time in nearly six weeks," says Mark McCormick at Credit Agricole.

Given this backdrop, it is hard to argue the impact accommodative monetary policy has had on 'risk' assets.

That said, the Fed minutes demonstrated that the Fed wants to remain cautious about the signals it is sending to markets.

McCormick reckons the near-term could well see the US dollar squeezed lower:

"The Fed is also concerned about tightening financial conditions too soon, especially as wage growth remains stagnant.

"The overall tone emphasised the “data dependent” nature of the policy outlook, which to us suggests more scope for the short squeeze in forex markets to persist."

Furthermore, the USD is considered overvalued at the current time:

"Relative to short-term 'cyclical' fundamentals the USD remains dear. Indeed, the residuals from our regression model suggest that the Bloomberg Dollar Index (BBDXY) is still one standard rich to fair value – based on the S&P 500, the VIX, commodity prices and the 2-year yield.

"Given the US data calendar is light until mid-October we think pullback in the USD has further room to run. Our estimates suggest the USD is about 3% overvalued but again we look to buy the USD on dips."

The call to buy on dips reflects the bottom line with regards to the dollar.

But - 2015 is still tipped to be another year dominated by dollar gains

Bank of America Merrill Lynch sum up this view and tell us:

"The recent USD increase is a mere blip in a much more persistent trend of currency depreciation, leaving trade fundamentally in a much better place than where it was in the last expansion.

"The dollar is rallying because the US economy is outperforming the rest of the world. That is a very different story to what we saw in, say, 2009, when the currency strengthened on flight-to-quality flows into treasuries during the height of the crisis. Thus, the economy is in a better position to withstand a currency shock today."

HSBC are also forecasting the dollar to do well in 2015:

HSBC also forecast the dollar exchange rate to continue its climb:

"We are only at the early stages of a USD bull run. We believe this will ensure it is not only the strongest currency in 2014, but also in 2015. Even though we have long been advocates of a strong USD, we have substantially revised many of our forecasts to reflect this expected USD supremacy."