Market Forecasts Calling for Renewed Dollar Strength

Market Forecasts Calling for Renewed Dollar Strength

Consensus forecasts from market analysts have started to show a marked shift from the rallies seen so far this quarter, which have benefited stock markets and high yielding currencies at the expense of safe have assets like Gold and the US Dollar. The sovereign debt crisis in Europe continues to be one of the guiding factors in the Dollar’s performance but recent improvements in macro economic data and corporate earnings releases have turned many analysts bullish on the prospects for the US economy for the remainder of the year. Relatively accommodative policies from the US central bank are also supportive of this and will likely underpin corporate growth for the same period.
Looking at specific macro date, most of the focus tends to e placed on employment figures, which can be seen in monthly payrolls additions, weekly jobless claims and in the unemployment rate, all of which have steadily improved through out the year. Overall, the economy is projected to show growth of 2.3 percent in 2012, and if these projections are accurate, it will nearly double the performance that is expected to be seen in the G10 economies as a whole.

Reversals in Trading Forecasts

Many of the larger fund managers have begun to reverse their previous calls for US Dollar weakness in light of this year’s economic data, with some brokerages now calling for and additional rise of 9 percent by the end of this year. This would equate roughly to the 1.20 level in the EUR/USD, a major reversal from its current position. These forecasts, however, are more moderate against the other major currencies, with consensus estimates calling for a 1 percent gain in the Dollar against the other G10 currencies. This is a major reversal of the forecasted drop of 4 percent relative to the G10 that was seen at the end of last year.
Looking at specific levels, the same analysts are looking for the Dollar to rise to 84 versus the Japanese Yen (USD/JPY). The rationale for this movement is largely based on the recent policy bias expressed by the Bank of Japan, which suggested a need for additional economic stimulus as a means for reviving growth in the island nation. This stimulus will most likely come in the form of increases to its asset purchase program, and these new measures could be announced as early as this week, as the BoJ holds its monthly policy meeting. Overall, these scenarios are likely to keep the US Dollar supported against most of the majors and recent weakness in the currency will be viewed by many as an appropriate reason to enter into new long positions, as this will also serve as a protective maneuver to guard against any external shocks resulting from the European debt crisis.