Salient to Investors:
Thomas Stolper at Goldman Sachs said:
- The US dollar will weaken through 2014 to $1.40 per euro for the first time since October 2011 and there will be only marginal support from interest rates.”
- Fed tapering is already priced in and will be offset by the Fed keeping its benchmark interest rates around zero even as it reduces bond purchases.
- All major central banks are on hold until at least late 2015 so there is no immediate catalyst for further gains in the dollar.
- The persistent deficit in the current account hurts demand for the dollar. The euro area had a current-account surplus in September for the 8th consecutive month.
- Capital is flowing out of the US and international investors would need to see a convincing growth story to commit more capital to the US, necessary for a breakthrough in the dollar.
The mean estimate of 46 polled analysts calls for a 7 percent dollar rally to $1.28 per euro: 42 expect the dollar to gain against the euro in 2014 as rising Treasury yields lure international investors from lower returning currencies. 10-yr Treasury notes yield 1.04 percent more than comparable German bunds.
BNP Paribas, Barclays, Morgan Stanley and others say a strengthening US economy will allow the Fed to taper.
Jose Wynne at Barclays said the dollar may rest for a while as the Fed gets away with the story that inflation is nowhere to be seen; but this may change in half2 2014 when inflation turns around. Barclays forecast the dollar will rally to $1.27 against the euro by the end of 2014.
Hans Redeker et al at Morgan Stanley said better relative economic growth in the US will be key in supporting the dollar, and the US private sector has de-levered more than the rest of developed markets.
Economists expect the US to grow 2.6 percent in 2014, versus 1 percent for the euro-region and 2.4 percent for the UK.
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