The following is an extract from our quarterly outlook, published 23rd June 2014. We’ve included our table of forecasts at the foot of the blog.
As mentioned before, we were not great buyers of the secular dollar bull trend for 2014. That view still holds and has been enhanced by subsequent events, principally the weaker economy and stronger pound. We’ve talked a lot in recent years about the change in dynamics surrounding FX markets. The “risk-on, risk-off” mantra that went by the wayside two years ago now, the shorter trends on major currencies and also the reduced impact of quantitative easing measures (see for example “From RORO to MoRO”).
We still expect to see the dollar gain through the latter half of 2014, but the gains are likely to be modest. On average, we’ve seen the dollar index trade an absolute annual range of around 8% (peak to trough) in recent history. This year, the range has been less than 3%. We were looking for an increase in the dollar index of around 4% for the year as a whole (currently 0.5%) and this is now likely to be more like half of this, given our underlying forecasts.
The Fed will continue with the current pace of tapering, but will keep their powder dry in relation to the tightening of policy. Another factor constraining the dollar this year has been the fall in bond yields. Asset market dynamics will continue to be a factor in the dollar’s fate. The debate as to where the greater valuation risks lie will continue, but both a fall in stocks and more so a bond market sell-off will have dollar positive implications.
Source: FxPro Internal Predictions