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
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?
British Pound Forecasts Raised
Early Rate Cuts for the UK
GBP/USD Vulnerable to USD Strength
EUR/USD to reach 1.10
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
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